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Disinvestment in India Methods , Procedures and Problems

Meaning of Investment

Conversion of money or cash into either :

Money Claims Securities Into Money or Cash

Securities Bonds Debentures Or any other form of money


Transfer of Government Ownership when the dilution is beyond 51 % Imperative for the Government to sell a part of its holdings

Less than 51%


Transfer Of Ownership


Government Holdings


Depoliticize Essential Services Reduce Financial Burden on Government

Encourage Wide Share in Ownership

Improve Public Finances

Introduce Competition with Market Discipline

Governments Strategy

Meet the growing budget deficit The Government knew that they could make more money by selling off their assets cheaply Faster realization value

Industries reserved for PSUs since December 2002

Atomic Energy

Minerals specified in schedule to atomic Energy (Control of Production and Use) Order, 1953

Railway Transport

Government Policies on Disinvestment

Government Policies

Bring down Government equity to 26% or lower

Restructuring of potential & viable P.S.U

Close down P.S.U that cant be revived Protect the interest of the workers

Methods of Disinvestment

Strategic Sale Capital Market

Offer for sale Fixed Price / Book Building Secondary market / Private Placement

Reduction in Equity

back of Shares Conversion of equity into other instruments

Other Methods

Trade Sale Asset Sale and Winding up

Management/Employees Buyout (M/EBO)

Cross Sale Sale through De-merger/Spinning off

Selection of PSU by MODI Approval by CCD Formation of IMG & Selection of Global Advisors

2-3 months

Submission of Expression of Interest Submission of Initial Technical Proposal

Due Diligence / Commercial negotiations 3-6 months

Finalise Shareholders Agreement (SHA) & Share Purchase Agreement (SPA)

Financial bids 1 week Selection of strategic partner & signing of SHA & SPA

Three Methods of valuation

Discounted cash flow Net asset value' approach Profit Earning Capacity

Problems in Disinvestment process

Soft Budget constraint

Policy adopted by the government. Multiple Control authorities

Reasons for Slow Progress

No clear framework or policy Disinvestment used to meet fiscal deficit No transparency

Failure to attract foreign buyers

Disinvestment Case Laws

BALCOs Disinvestment

The deal was like loot of Chattisgarh in a day-light robbery.

- Chattisgarh CM, Ajit Jogi.

"Sterlite's offer for Balco is more than fair."

- Business World, March 12, 2001.

Fact File

Top line 898 Cr. PAT 56 Cr. HC 7500

Sale of 51% stake in Balco (Management Control)

Case for Disinvestment

Company running on Outdated technology. Cash reserve 500 Cr. not adequate for Modernization

Share of Operating profit in total Profit

Impact of Aluminum prices

Company recovered from state of sickness and hence right time for sale.

Bidders for Strategic Stake

Hindalco (Birla Group)

Alcoa (US based) Sterlite Ind. (Anil Agarwal)

Valuation Conundrum
Valued on 4 Parameters (JP Morgan)

cash flow Comparative valuation Balance sheet Asset valuation

Control premium added to arrive at reserve price

Analysis Paralysis

Reserve Price fixed at 514 Cr. using 25% mark up to the valuations arrived by DCF Model

Hue and cry by Opposition over valuation methodology Question Earnings Vs Asset Value

The Verdict

Sterlite Industries emerges as the highest bidder with an offer of 551 Cr.

Post Sell Out Drama

Lack of Transparency Political Pressure & threats

Allegations of Under hand deals

Company wide Agitation, strike continued for 67 days

Post Sell out Drama

Threat of damage to companys assets Supreme Courts role Union Management Meetings Agreement Signed



Clear policy & framework for disinvestment process

De-link disinvestment with budgetary control exercise

Disinvestment process be audited by at least 2 reputed auditing firms

Creation of separate disinvestment fund

Yearly action plan should be taken