Description
In finance and economics, divestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.
Economics
STUDY ON DISINVESTMENT
CONTENTS
• INTRODUCTION.
• COMMON MINIMUM PROGRAMME.
• CASES:
? CENTAUR, JUHU BEACH. ? CENTAUR, AIRPORT HOTEL. ? BHEL.
•
4. DISCUSSION. 5. TABLES: [1991-92 to 2003-04]
? METHODOLOGIES ADOPTED. ? REALISATION THROUGH
•
STRATEGIC SALE.
DISINVESTMENT
Economics
INTRODUCTION:
Disinvestment is the action of an
organization or government of selling or liquidating an asset or subsidiary.
EVOLUTION OF DISINVESTMENT POLICY
It has been decided that Government would disinvest up to 20 per cent of its equity in selected public sector undertakings, in favour of mutual funds and financial or investment institutions in the public sector. The disinvestment, which would broad base the equity, improve management and enhance the availability of resources for these enterprises, is also expected to yield Rs. 2,500 crores to the exchequer in1991-92. The modalities and details of implementing this decision, which are being worked out, would be announced separately. The policy, as enunciated by the Government, under the Prime Minister Shri Chandrashekhar was to divest up to 20% of the Government equity in selected PSEs in favour of public sector institutional investors. The objective of the policy was stated to be to broad-base equity, improve management, and enhance availability of resources for these PSEs and yield resources for the exchequer.
PROBLEMS
ASSOCIATED
WITH
DISINVESTMENT:
A number of problems and issues have bedeviled the disinvestment process. The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of better-performing PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment. These organizations have not been very enthusiastic in listing and trading of shares purchased by them as it would reduce their control over PSUs. Instances of insider trading of shares by them have also come to light. All this has led to low valuation or under pricing of equity.
DISINVESTMENT
Economics
Further, in many cases, disinvestment has not really changed the ownership of PSUs, as the government has retained a majority stake in them. There has been some apprehension that disinvestment of PSUs might result in the ‘crowding out’ of private corporates (through lowered subscription to their shares) from the primary capital market An important fact that needs to be remembered in the context of divestment is that the equity in PSUs essentially belongs to the people. Thus, several independent commentators have maintained that in the absence of wider national consensus, a mere government decision to disinvest is not enough to carry out the sale of people’s assets. Inadequate information about PSUs has impeded free, competitive and efficient bidding of shares, and a free trading of those shares. Also, since the PSUs do not benefit monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses. This has in turn prevented the disinvestment process from being completely open and transparent. Lastly, to the extent that the sale of government equity in PSUs is to the Indian private sector, there is no decline in national wealth. But the sale of such equity to foreign companies has far more serious implications relating to national wealth, control and power, particularly if the equity is sold below the ‘correct’ price. If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically, issues such as - the ‘correct’ valuation of shares, the ‘crowding out’ possibility, the appropriate use of disinvestment proceeds and the institutional and other prerequisites. Disinvestment is generally expected to achieve a greater inflow of private capital and the use of private management practices in PSUs, as well as enable more effective monitoring of management discipline by the private shareholders. Such changes would lead to an increase in the operational efficiency and the market value of the PSUs. This in turn would enable the much needed revenue generation by the government and help reduce deficit financing. However, to date the market experience has been otherwise. The large national budgetary deficit on revenue account has been increasing. The DISINVESTMENT
Economics
government has not used the disinvestment proceeds to finance expenditure on capital account; i.e. the disinvestment policy has resulted in capital consumption rather than generation. Administrative costs of the disinvestment process have also been unduly high. The actual receipts through disinvestment have often fallen far short of their target. During the period 1991-92 to 2002-2003, the government had targeted the mobilization of about Rs. 78,300 crores through disinvestment, but it could actually mobilize only Rs. 30,917 crores After a great deal of initial excitement and reservations, disinvestment of public sector enterprises has become an ongoing process in the country. But the debate continues, with some enthusiastically endorsing it and others expressing apprehensions and opposition. By and large, this debate has been at the ideological level. Ideology cannot be kept out of the debate, but disinvestment has other dimensions too. The modalities of disinvestment are important. So are its consequences. One possibility is strategic sale with complete transfer of management to an enterprise in the private sector. Modern Food Industries, Bharat Aluminum Company Limited (BALCO), VSNL, Centaur Hotel Airport Mumbai and a few others were sold off in this manner. A second procedure adopted was partial disinvestment whereby the government still retained effective control by holding 51 per cent or more of equity. This has been the procedure adopted in the majority of cases. This is not a simple procedure, though. A decision has to be made as to who would be eligible to acquire the shares - other enterprises, employees or the public at large - and the manner in which the shares are to be off-loaded.
DISINVESTMENT
Economics
National Common Minimum Programme
The policy of the Government as stated in the National Common Minimum Programme of May, 2004 is as follows: “The Government is committed to a strong and effective Public Sector whose social objectives are met by its commercial functioning. But for this, there is need for selectivity and a strategic focus. It is pledged to devolve full managerial and commercial autonomy to successful, profit-making Companies operating in a competitive environment. Generally, profit-making Companies will not be privatised. All privatisations will be considered on a transparent and consultative case-by-case basis. The existing “Navaratna” companies will be retained in the public sector while these companies raise resources from the capital market. While every effort will be made to modernize and restructure sick public sector companies and revive sick industry, chronically loss-making companies will either be sold-off, or closed, after all workers have got their legitimate dues and compensation. The Government will induct private industry to turn around companies that have potential for revival. The Government believes that privatisation should increase competition, not decrease it. It will not support the emergence of any monopoly that only restricts competition. It also believes that there must be a direct link between privatisation and social needs – like, for example, the use of privatisation revenues for designated social sector schemes. Public sector companies and nationalized banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors.”
DISINVESTMENT
Economics
DISINVESTMENT
Economics
CENTAUR, JUHU BEACH
A true-blue 5 star Deluxe, the Centaur Juhu rises sphinx like from the golden sands of Mumbai's famous Juhu beach. Shaped like a luxury liner, the hotel nestles between the city and the rapidly developing industrial belt of the suburbs.
Disinvestment of the hotel/flight kitchens of the Hotel Corporation of
India, a subsidiary of Air India, was initiated by Air India under the supervision of the Ministry of Civil Aviation. A Sub-Committee of the Board of Air India was constituted by the said Board to oversee the disinvestment process. On the basis of the Sub-Committee's recommendation, Air India appointed M/s Jardine Fleming Securities India Ltd. (currently known as M/s JP Morgan India Pvt. Ltd) as Global Advisors on June 6, 2000. An advertisement inviting Expressions of Interest from the prospective bidders was issued by Air India on October 11-12, 2000 for all the businesses of the Hotel Corporation of India including Centaur Hotel, Juhu Beach, and Mumbai. The Sub-Committee, with the assistance of the Global Advisors, accomplished: (i) (ii) (iii) (iv) (v) (vi) Finalisation of the transaction structure of selling the individual businesses on slump sale basis; Finalisation of the Confidential Information Memorandum; Shortlisting of bidders; Appointment of Legal Advisors and Asset Valuers; Conducting data room study and due diligence by the bidders; and Finalisation of transaction documents.
On 27th September 2001, based on a Government decision, the Department of Disinvestment took over the process of disinvestment in Hotel Corporation of India. After taking over the process, Department of Disinvestment constituted an Inter-Ministerial Group and adopted the transaction structure and transaction documents as finalized by Air India.
DISINVESTMENT
Economics
For the five businesses of Hotel Corporation of India that were offered for sale, the Qualified Interested Parties had already been identified. In respect of Centaur Hotel Juhu Beach, Mumbai, Expressions of Interest were received initially from 20 parties of whom three were found to be ineligible. Of the remaining 17 Qualified Interested Parties, 16 did not furnish the prescribed Expression of Intent Letters along with the Earnest Money Deposit of Rs. 5 lakhs, thereby withdrawing themselves from further participation from the disinvestment process. Therefore, there was only one Qualified Interested Party. On 24th October 2001, the Global Advisors addressed the Qualified Interested Party, viz., namely, M/s Tulip Hospitality Services Ltd asking it to submit its price bid on 6th November 2001. M/s Tulip Hospitality Services Ltd submitted its price bid on 6th November 2001. An Evaluation Committee comprising the concerned Joint Secretaries of the Ministry of Civil Aviation and the Ministry of Disinvestment and the Managing Directors of Air India and Hotel Corporation of India under the chairmanship of the Joint Secretary & Financial Advisor, Ministry of Civil Aviation met on 8th November 2001. After detailed consideration of the asset valuation report prepared by the Asset Valuer (M/s Kanti Kararnsey & Co., Mumbai), the valuation report prepared by the Global Advisor and the merits and demerits of the various methods of valuation adopted by them and the then prevailing market conditions, the Evaluation Committee determined the reserve price for Centaur Hotel Juhu beach Mumbai at Rs. 101.60 crores. The price bid, which was in a sealed cover, was thereafter opened by the Evaluation Committee on 8th November 2001. The bid was for Rs.153.00 crores. The Evaluation Committee recommended for acceptance the financial bid submitted by M/s Tulip Hospitality Services Ltd of Rs.153.00 crores for Centaur Hotel Juhu Beach, Mumbai, since it was above its determined reserve price. The Inter-Ministerial Group, in its meeting held on 9th November 2001, accepted the recommendation of the Evaluation Committee. The recommendations of the Evaluation Committee/InterMinisterial Group were accepted by the Core Group of Secretaries on Disinvestment on 9th November 2001 and by the Cabinet Committee on Disinvestment on 10th November 2001. Initially, Air India proposed to execute the Agreement to Sell by 21st December 2001 and notified M/s Tulip Hospitality Services Ltd. However, M/s Tulip Hospitality Services Ltd made a series of representations from time to time, seeking extensions for conclusion of the transaction. Three extensions were given to M/s Tulip DISINVESTMENT
Economics
Hospitality Services Ltd, the last being on 23rd February 2002. These extensions were given apparently with the view to complete the sale of Centaur Hotel, Juhu Beach, Mumbai at a price of Rs.153 crores, which was above the reserve price of Rs.101.60 crores. Since some concerns had arisen with respect to M/s Tulip Hospitality Services Limited's ability to meet the financial obligations under the transaction, a decision had been taken on 21st February 2002 to invoke the Bank Guarantee of M/s Tulip Hospitality Services Limited and to terminate the deal. However, the Chairman, M/s Tulip Hospitality Services Limited met the then Minister of Disinvestment on 22nd February, 2002, and sought an opportunity to demonstrate M/s Tulip Hospitality Services Limited's intent to complete the transaction by producing his consortium of bankers before the Minister. On 23rd February 2002, M/s Tulip Hospitality Services Limited and the consortium of bankers, which consisted of both public sector banks and private banks, met the then Minister of Disinvestment and committed to finance the sale transaction by 9th March, 2002. On this commitment, a further extension was granted on 23rd February, 2002, until 9th March, 2002. Since, 9th March, 2002 was a Saturday, high value clearing did not take place and, consequently, the transaction was completed on 11th March 2002. The business was transferred to M/s Tulip Hospitality Services Limited on 31st May 2002 on completion of transaction formalities. As per the transaction Agreement, M/s Tulip Hospitality Services Limited was bound to offer a Voluntary Retirement Scheme to the employees of the hotel by 30th May, 2003. Anticipating that the management might not offer the Scheme in time, the Officers' Association filed a writ in the Bombay High Court on 9th May, 2003 itself. On the directions of the High Court, M/s Tulip Hospitality Services Limited introduced a Voluntary Retirement Scheme on 1st October, 2003. Since this was not fully acceptable to the Association, it approached the High Court again. However, the High Court did not give any further relief. Thereafter, on 1st July, 2004, the Association moved the matter before a Division Bench of the Bombay High Court. While the matter is before the Division Bench, the Officers' Association and the management have come to an agreement on all critical issues on 6th August, 2004. On the basis of this agreement, M/s Tulip Hospitality Services Limited filed an affidavit before
DISINVESTMENT
Economics
the Bombay High Court on 12th August, 2004. The case now stands adjourned to 10th January 2005. It looks odd that it was a single bidder transaction. It further looks odd that the Discounted Cash Flow method of evaluation was adopted in this case. We do not think that this method is the only method, or the most appropriate method of evaluation in all cases. It further looks odd that so much indulgence was granted to the bidder by way of not invoking the bank guarantee, which was ordered twice, and by way of granting him repeated extensions. We personally think that as a result of its disinvestment zeal, the then Government overlooked some discomforting aspects of this transaction. The agreement does not permit the resale. The matter is now sub judice before the High Court of Bombay regarding the Voluntary Retirement Scheme. But, if there is a violation of agreement, certainly the Ministry of Civil Aviation will be advised to take necessary action.
DISINVESTMENT
Economics
CENTAUR, AIRPORT HOTEL
I
t was an announcement that shocked even the overzealous minister for
disinvestment, who believes nothing can go wrong with his high profile drive to sell public properties at a rapid pace. On October 18, 2002, Batra Hospitality Pvt Ltd announced that it had sold Centaur Airport Hotel at Mumbai to the Sahara India group for a sum of Rs 115 crores. What was reported as a routine commercial transaction by A L Batra of Batra Hospitality has triggered a controversy that is likely to prove extremely embarrassing to the government. This was because the Airport Centaur had been acquired by Batra from the Air India subsidiary Hotel Corporation of India (HCI) for a sum of just Rs 83 crores, barely six months back. At that time, this sale of Airport Centaur (along with the Centaur Hotels in Juhu and Rajgir) was presented as one more case of the highly successful and transparent, accelerated disinvestment drive that Arun Shourie had launched.
THE issue of resale of the disinvested Mumbai airport Centaur hotel at a premium of Rs 32 crores was raised on by an independent panel that included CPI (M) Member of Parliament, Mr. Dipankar Mukherjee. Addressing a press conference here, Mr. Mukherjee said that the "links" between Batra Hospitality that bought the hotel and resold it at a substantial premium, and former Prime Minister, Mr. Atal Bihari Vajpayee's son-inlaw, Mr. Ranjan Bhattacharya, should be probed by the Central Bureau of Investigation (CBI). Terming Batra Hospitality as a "shell company" that "did not have the financial strength or experience in running a hotel," Mr Mukherjee said the hotel was sold to it because of its owner's experience in running Delhi's Radisson Hotel through AB Hotels Ltd. "Are these links coincidental, incidental or accidental? We are not putting anyone in the dock. What we want is that the CBI should investigate and DISINVESTMENT
Economics
expose the entire scam," Mr Mukherjee said at a press conference in which the CPI (M) General Secretary, Mr Prakash Karat, was also present. Mr. Karat said he was only a "facilitator" for the three-member panel headed by Mr. Mukherjee, which looked into the matter. Other members of the panel were Supreme Court lawyer, Mr. Prashant Bhushan, and journalist, Mr. Paranjoy Guha Thakurta, who were also present at the press conference. Referring to reports quoting CBI that it was not finding much material to proceed with the probe into the Airport Centaur deal, Mr. Karat said, "We are releasing this material in public interest and to help the Government and CBI proceed in this matter." Yielding to demands of the Left parties, the Congress-led UPA Government on Friday announced an inquiry into the controversial sale of two stateowned Centaur Hotels in Mumbai in view of severe criticism made by the Comptroller and Auditor General (CAG) of the then BJP-led NDA Government for undervaluation of the hotels. After examining CAG’s report, the government decided to order an inquiry, Finance Minister P Chidambaram announced in both the Houses of Parliament. The nature and scope of enquiry would be announced in due course, he said in a brief suo motu statement. Significantly, when this announcement was made, the Opposition NDA was not present as it was boycotting Parliament. The Finance Minister’s statement was necessitated by persistent demands of the Left parties that the government should order an inquiry by the CBI into the sale of Centaur Juhu and Centaur Airport Hotels.
The CAG in its report had pulled up the Disinvestment Ministry under Arun Shourie during the previous NDA Government for undervaluation and sale of the hotels without the benefit of competition. It had concluded that assumptions made during valuation of the properties and fixation of reserve price was not consistent with the practice followed by the Ministry in other cases. The CAG even noted various relaxations allowed to the bidder and DISINVESTMENT
Economics
interventions by the Ministry to facilitate sale that indicated inadequate efforts to mitigate the risk of transaction. The efforts made to balance the need and urgency to sell the properties and to obtain the best possible price were also not evident, it had stated. Mr. Shourie had said that the Disinvestment Ministry did no wrong and that he was prepared to face any inquiry.
BHARAT HEAVY ELECTRICALS LIMITED
The Company's principal activities are to manufacture and distribute
electrical, electronic, mechanical and nuclear power equipment. The Company operates under two segments: Power sector and Industry sector. Power sector includes products and services relating to power generation sets and its auxiliaries. Industry sector includes products and services relating to transportation and transmission, electric machines, industrial sets and DG sets, telecommunications and other industrial products and systems. The plants of the Company are located in, Ranipet, Goindwal, Jagdishpur, Tiruchy, Rudrapur, Hyderabad, Bangalore and other places
DISINVESTMENT
Economics
Employees: 43952
Bharat Heavy Electricals Limited
Ticker: 500103 Exchanges: BOM 2004 Sales: 80,190,000,000 Major Industry: ELECTRICAL Sub Industry: MISCELLANE OUS ELECTRICAL Country: INDIA
BHEL DISINVESTMENT
E
very policy decision taken by the UPA Government must draw its
sustenance from the Common Minimum Programme (CMP) adopted by the alliance partners, the yardstick that has also to be applied to the BHEL partial disinvestment case. DISINVESTMENT
Economics
This specific issue has been brewing for quite some time, and every time a decision was seen to be imminent it was shelved for consideration later. On Thursday, the Manmohan Singh Government went ahead with the decision to sell 10 per cent of government equity which has, expectedly, set the cat among the pigeons as it were. According to reports, a statement issued by the CPI(M) said: "BHEL is a navratna public sector unit which is making significant profits in a competitive environment. BHEL significantly contributes to strengthening of India's economic self-reliance. The CMP, on whose basis this Government is meant to function, clearly states that the UPA will encourage and strengthen the navratnas to become global players. The CMP also categorically states that the Government shall not disinvest/privatize the profit-making PSUs. In the light of these commitments made in the CMP, the CPI(M) considers the Cabinet decision contradictory." Apart from the fact that the Finance Minister himself has said that the Left was "consulted" before the decision was taken, Government "managers" have been reported as saying that the step had been taken in accordance with the norms contained in the CMP. To quote them (as reported): "The CMP is very clear. It has only said that `generally' profit-making PSUs will not be privatised. In any case, even after the decision, 58 per cent stake will remain in Government hands. Besides, the CMP has said that all privatisation will be considered on a transparent and consultative case-by-case basis. It has also said that navratnas will be allowed to raise resources from the capital market". What does the CMP itself have to say on the subject? To quote the relevant portion of the Programme: "The UPA Government is committed to a strong and effective public sector whose social objectives are met by its commercial functioning. But for this there is need for selectivity and a strategic focus. The UPA is pledged to devolving full managerial and commercial autonomy to successful, profit-making companies operating in a
DISINVESTMENT
Economics
competitive environment. Generally, profit-making companies will not be privatised". The document continues: "All privatisation will be considered on a transparent and consultative case-by-case basis. The UPA will retain existing `navratna' companies in the public sector, while these companies raise resources from the capital market. It also believes that there must be a direct link between privatisation and social needs — like, for example, the use of privatisation revenues for designated social sector schemes. Public sector companies and nationalised banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors." As far as encouragement to "retail investors" is considered, the Government has been careful enough to split the stock offered for disinvestment so that a portion is reserved exclusively for the average citizen. The details of the split-ratio are to be announced later "in consultation with the Departments of Disinvestment and Heavy Industry" and after the choice of the lead manager. As regards the expenditure of the proceeds on "social needs", the Government has said that three-quarters of the funds (around Rs 2, 200 crore) will be spent on health and education, the remaining 25 per cent going into the revival of ailing PSUs. Most important, the disinvestment proceeds will not be reflected in the Budget, a euphemism for the disappearance of the funds into the bottomless and colourless pit of the Consolidated Fund of India. This is all very good, above board, and so on, but the basic issue appears to be whether the 10 per cent of government equity which will be put up for sale could have been leveraged to make BHEL even stronger and more effective, furthering the objective of making the company even more profitable in the highly competitive business world of today. This is the issue that needs to be gone into in some depth because what the 10 per cent sale decision could in fact mean is that BHEL's long-term strategic interests have been sacrificed in the interests of garnering a few
DISINVESTMENT
Economics
thousand crores rupees today, which may or may not be utilized effectively, and in any case will not help the company in any way.
THE MOST PROMINENT DISCUSSION
: Why is privatisation important to India? Arun Shourie: Because we have some 240 public sector companies in the central government and about 1,000 in the state governments, and they're not doing well. The average rate of return from the central DISINVESTMENT
Economics
government enterprises is only about 4 per cent, when the government itself borrows at 10-11 per cent. And, worse than that, if you take away the areas in which the government has a monopoly, like petroleum, then the rate of return is minus 4 per cent. All efforts to revive these companies have not really succeeded. Bringing in aggressive private partners is the best way to make them more competitive. Q: How would you rate your own progress so far in pushing ahead with privatisation? A: In the last ten months, we have completed 18 transactions - which is pretty big. My aim is to get privatisation off the front pages. It should become a routine affair. We have successfully explained our position on privatisation in 10 debates in Parliament lasting nearly 80 hours. We have answered about 600 parliamentary questions. We have thwarted 19 challenges in the courts and ultimately received the strongest endorsement from the Supreme Court of India, which says that the process being followed is completely transparent, just and fair. So we've made great progress. Q: How about your performance vis-a-vis financial targets the government has set for receipts from privatisation? A: I don't work on the basis of financial targets. Some such targets have been mentioned by the finance minister in his Budget. But those are approximations. And even he agrees that we can't just go on the basis of those targets, because then we will be accused of making distress sales. We are laying the foundations of a process that is going to last 10 years, so we must be very thorough about this. We are satisfied at the pace at which we are working. Q: What about the quality of the assets on sale? It is alleged that a lot of them are junk. What is your comment? A: I don't think so. Some are junk if you do nothing with them and persist with them as they are. But when investors see that there is now the real prospect of bringing in aggressive private partners to run these companies, it's a different story. Note that it's the stocks of government-related companies that have led the remarkable recent turnaround in the Indian stock market. And we can take credit for unlocking the hidden value in some of these companies.
DISINVESTMENT
Economics
Q: What assets do you believe would be of interest to Singapore investors? A: The assets are across the spectrum - from mines and metals to telecoms, to many others. There was a very good prospect in aviation, but I won't be reviving that very soon. Q: Why not? A: Well both sides missed out an a very fine opportunity. India certainly missed out. And Singapore, because it was a very orderly society, was not used to the very high-decibel of debate in India. I was counselling them: just wait for 15 days. But then, they started looking at other prospects such as Ansett Airlines. And since then, the aviation industry itself fell into uncertain times. So I think it's best to first strengthen our aviation enterprises - both domestic and foreign - before looking for strategic partners. Q: What lessons has India drawn from the experience of Singapore Airlines attempts to buy into Air India? A: I think the main lesson should be drawn by the people who participate in our public discourse and public life. It is that we need better partners who will change the work culture of our enterprises. And if we scare them away with our shouts then we loose. They may just lose a business opportunity, but we lose an opportunity to improve our work culture. I mention this in Parliament when the shouting was going on. I said: " You are scaring away bidders." And when that actually happened, I told them: " I told you so." Q: And is your message getting through? A: I think so. In the last 15 privatisations, there have been hardly any criticisms, just some pro-forma noises. Maybe when the next Parliament session starts on 15th there will be some shouting but I feel we are getting the message through. We are especially getting through to labour, which used to be instigated by others who scared them by saying:" You will loose your jobs." But labour is actually finding out that privatisation is the best way for their enterprises to survive and become more competitive. The new owners and partners have entered into long term wage agreements with workers. Wages have increased in some cases, by more than 20 per cent. Q: Where are the main obstacles you face?
DISINVESTMENT
Economics
A: The main obstacles we face are similar to what the US and Europe face with agricultural subsidies. Only 3-4 per cent of population depends on these subsidies, but a politics and a discourse congeals around the issue. That's our main difficulty. Second, in India, we have a fractured electorate and fractured legislatures, so everybody has power to block anything, and not many people have enough power to push things through. But that problem will be alleviated in coming months because state governments are now on the brink of beginning privatisation of their own enterprises. So if they do it in their states, they can't oppose it at the centre. Q: But don't you have opposition from even within your own party? A: Well, yes, because every party is diverse and everybody has an opinion, But in one or two years, with fifty enterprises privatised and the results visible, this opposition will subside. It is important to remember that in India, when a reform is first proposed, there is a lot of shouting. But than two years later, after it has been introduced and gone through, nobody even noticed it. Q: Can you give an example of this? A: When India was to sign the convention on intellectual property rights, there was a lot of opposition. But it was signed, and now nobody shouts. Then, on allowing foreign companies into the insurance sector, there was again a lot of shouting. But now, foreign firms have come in, and many people don't even know this. So it is with privatisation. If you ask the original opponents "How many enterprises have been sold in the last ten months?" I don't think they will come up with a figure close to eighteen. Q: Are their benefits from privatisation that you can already point to? A: Take the case of Modern Foods, which makes bread. Its sales are about ninety per cent higher than just a year ago. Workers average pay has increased. The plants are hygienic. In the case of Balco (Bharat Aluminium Company), an expansion programmme of 3000 (three thousand) crore rupees (S $1.05 billion) has been announced. Not a single worker has been retrenched. A five year wage agreement has been entered into, which provided for an immediate twenty percent increase in the basic wage. Q: What privatization process are you following?
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Disinvestment from 1991-92 to 2004-05, the methodologies adopted
A: The initial approach was to unload some government shareholding, in the form of minority stakes. But this was not changing the work culture or the managements of enterprises. So now, the government is going in for strategic partners and, in some cases, outright sale. We are willing to relinquish majority control in all but a few strategic industries like defence, atomic energy and railways. We have also now introduced an element in which, let’s say the government maintains 26 per cent equity in the first round. But if the enterprise starts to do really well, the government exits even sooner. Q: Over what time frame do you hope to complete India’s privatization, and what will satisfy you that it has been a success? A: I have studied 14 countries privatizations, and they have lasted 10-17 years. I would expect India’s privatization to last 10 years or so. It will gather momentum and become a routine affairs. I have been pushing for it for 30 years. I will fill vindicated when a process is in place – as it is now- and when there is not a single allegation of corruption or wrongdoing. I have said many times in Parliament that if you want to make any allegation like this, make it outside the legislature and I will sue you in court. And now, those very persons who made such allegations last year are saying: “Oh, but I never opposed privatization.”
DISINVESTMENT
Year
No. of transac tions in Target receipt which (Rs. in Crore) equity sold
Actual Economics receipts (Rs. in Crore)
Methodology
1991-92
47
2500
Minority shares sold in Dec 1991 and Feb 3037.74 1992 by auction method in bundles of "very good", "good" and "average" companies 1912.42 Shares sold separately for each company by auction method. Equity of 6 companies sold by open auction but proceeds received in 94-95.
1992-93
29
2500
1993-94
-
3500
0.00
1994-95
17
4000
Sale through auction method, in which NRIs 4843.10 and other persons legally permitted to buy, hold or sell equity, allowed to participate. 168.48 Equities of 4 companies auctioned 379.67 GDR (VSNL) in international market. 910.00 GDR (MTNL) in international market. GDR (VSNL) / Domestic offerings with the participation of FIIs (CONCOR, GAIL). 5371.11 Cross purchase by 3 Oil sector companies i.e. GAIL, ONGC & IOC GDR—GAIL, VSNL-domestic issue, 1860.14 BALCO restructuring, MFIL’s strategic sale and others 1871.26 Strategic sale of BALCO, LJMC; Takeover KRL (CRL), CPCL (MRL), BRPL
1995-96 1996-97 1997-98
5 1 1
7000 5000 4800
1998-99
5
5000
5
10000
2000-01
5
10000
2001-02 #
8
Strategic sale of CMC – 51%, HTL –74%, VSNL – 25%, IBP – 33.58%, PPL-- 74%, DISINVESTMENT 12,000 5632.25 and sale of hotel properties of ITDC & HCI; receipt from surplus cash reserves from STC
Economics
# Figures are inclusive of control premium, dividend/dividend tax, restructuring and transfer of surplus cash reserves prior to disinvestment.
Realisation through strategic sale during 1999-2000 to 2004-05
Sr. No Name Percentage of Government Equity sold Realisation Rs. in crore Profit/Loss Making during the year of disinvestment Loss Making
1 a. Modern Food Industries (India) Ltd. (MFIL) 1 b. (MFIL) Phase II 3a. 3b 4 5. CMC Ltd. CMC Ltd. HTL Lagan Jute Machinery Corporation ITDC-19 HOTELS 6. Hotel Agra Ashok
74
105.45
25.995 51
44.07 152 6.07 Profit Making
74 74
55 2.53
Profit Making Loss Making
89.97 DISINVESTMENT
3.61
Loss Making
Economics
7 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.
Hotel Bodhgaya Ashok Hotel Hassan Ashok TBABR Mamallapuram Hotel Madurai Ashok Hotel Ashok Bangalore * Qutab Hotel, New Delhi Lodhi Hotel, New Delhi LVPH, Udaipur Hotel Manali Ashok KABR, Kovalam Hotel Aurangabad Ashok Hotel Airport Ashok, Kolkata Hotel Khajuraho Ashok Hotel Varanasi Ashok
89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97
1.81 2.27 6.13 4.97 39.41 34.46 71.93 6.77 3.65 40.39 16.50 19.39
Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making
19. 20.
89.97 89.97
2.19 8.38
Loss Making Loss Making
DISINVESTMENT
Economics
21. 22.
Hotel Kanishka, New Delhi Hotel Indraprastha , New Delhi Chandigarh Hotel project Hotel Ranjit, New Delhi HCI - Centaur Hotel Juhu Beach, Mumbai HCI-Indo Hokke Hotels Ltd.(Centaur Rajgir) HCI - Centaur Hotel Airport, Mumbai IBP Co Ltd Videsh Sanchar Nigam Ltd. Paradeep Phosphates Ltd. Hindustan Zinc Ltd.
89.97 89.97
92.37 43.39
Loss Making Loss Making
23. 24. 25.
89.97 89.97 100
17.27 29.28 153
Loss Making Loss Making Loss Making
26.
100
6.51
Profit Making
27.
100
83
Loss Making
28. 29.
33.58 25
1153.68 3689
Profit Making Profit Making
30. 31 (a) 31 (b)
74 26
151.70 445
Loss Making Profit Making
Hindustan Zinc Ltd.
6.19
DISINVESTMENT
Economics
31 (c) 32 33.
Hindustan Zinc Ltd.
18.92
323.88
Maruti Udyog Ltd. Indian Petrochemicals Corporation Ltd. State Trading Corporation of India MMTC Ltd. Jessop & Co Ltd Grand Total
4.2 26
1000 1490.84
Profit Making Profit Making
34.
40
35 36
60 72 18.18 10257.19 Loss Making
DISINVESTMENT
Economics
DISINVESTMENT
doc_252231301.doc
In finance and economics, divestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.
Economics
STUDY ON DISINVESTMENT
CONTENTS
• INTRODUCTION.
• COMMON MINIMUM PROGRAMME.
• CASES:
? CENTAUR, JUHU BEACH. ? CENTAUR, AIRPORT HOTEL. ? BHEL.
•
4. DISCUSSION. 5. TABLES: [1991-92 to 2003-04]
? METHODOLOGIES ADOPTED. ? REALISATION THROUGH
•
STRATEGIC SALE.
DISINVESTMENT
Economics
INTRODUCTION:
Disinvestment is the action of an
organization or government of selling or liquidating an asset or subsidiary.
EVOLUTION OF DISINVESTMENT POLICY
It has been decided that Government would disinvest up to 20 per cent of its equity in selected public sector undertakings, in favour of mutual funds and financial or investment institutions in the public sector. The disinvestment, which would broad base the equity, improve management and enhance the availability of resources for these enterprises, is also expected to yield Rs. 2,500 crores to the exchequer in1991-92. The modalities and details of implementing this decision, which are being worked out, would be announced separately. The policy, as enunciated by the Government, under the Prime Minister Shri Chandrashekhar was to divest up to 20% of the Government equity in selected PSEs in favour of public sector institutional investors. The objective of the policy was stated to be to broad-base equity, improve management, and enhance availability of resources for these PSEs and yield resources for the exchequer.
PROBLEMS
ASSOCIATED
WITH
DISINVESTMENT:
A number of problems and issues have bedeviled the disinvestment process. The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of better-performing PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment. These organizations have not been very enthusiastic in listing and trading of shares purchased by them as it would reduce their control over PSUs. Instances of insider trading of shares by them have also come to light. All this has led to low valuation or under pricing of equity.
DISINVESTMENT
Economics
Further, in many cases, disinvestment has not really changed the ownership of PSUs, as the government has retained a majority stake in them. There has been some apprehension that disinvestment of PSUs might result in the ‘crowding out’ of private corporates (through lowered subscription to their shares) from the primary capital market An important fact that needs to be remembered in the context of divestment is that the equity in PSUs essentially belongs to the people. Thus, several independent commentators have maintained that in the absence of wider national consensus, a mere government decision to disinvest is not enough to carry out the sale of people’s assets. Inadequate information about PSUs has impeded free, competitive and efficient bidding of shares, and a free trading of those shares. Also, since the PSUs do not benefit monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses. This has in turn prevented the disinvestment process from being completely open and transparent. Lastly, to the extent that the sale of government equity in PSUs is to the Indian private sector, there is no decline in national wealth. But the sale of such equity to foreign companies has far more serious implications relating to national wealth, control and power, particularly if the equity is sold below the ‘correct’ price. If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically, issues such as - the ‘correct’ valuation of shares, the ‘crowding out’ possibility, the appropriate use of disinvestment proceeds and the institutional and other prerequisites. Disinvestment is generally expected to achieve a greater inflow of private capital and the use of private management practices in PSUs, as well as enable more effective monitoring of management discipline by the private shareholders. Such changes would lead to an increase in the operational efficiency and the market value of the PSUs. This in turn would enable the much needed revenue generation by the government and help reduce deficit financing. However, to date the market experience has been otherwise. The large national budgetary deficit on revenue account has been increasing. The DISINVESTMENT
Economics
government has not used the disinvestment proceeds to finance expenditure on capital account; i.e. the disinvestment policy has resulted in capital consumption rather than generation. Administrative costs of the disinvestment process have also been unduly high. The actual receipts through disinvestment have often fallen far short of their target. During the period 1991-92 to 2002-2003, the government had targeted the mobilization of about Rs. 78,300 crores through disinvestment, but it could actually mobilize only Rs. 30,917 crores After a great deal of initial excitement and reservations, disinvestment of public sector enterprises has become an ongoing process in the country. But the debate continues, with some enthusiastically endorsing it and others expressing apprehensions and opposition. By and large, this debate has been at the ideological level. Ideology cannot be kept out of the debate, but disinvestment has other dimensions too. The modalities of disinvestment are important. So are its consequences. One possibility is strategic sale with complete transfer of management to an enterprise in the private sector. Modern Food Industries, Bharat Aluminum Company Limited (BALCO), VSNL, Centaur Hotel Airport Mumbai and a few others were sold off in this manner. A second procedure adopted was partial disinvestment whereby the government still retained effective control by holding 51 per cent or more of equity. This has been the procedure adopted in the majority of cases. This is not a simple procedure, though. A decision has to be made as to who would be eligible to acquire the shares - other enterprises, employees or the public at large - and the manner in which the shares are to be off-loaded.
DISINVESTMENT
Economics
National Common Minimum Programme
The policy of the Government as stated in the National Common Minimum Programme of May, 2004 is as follows: “The Government is committed to a strong and effective Public Sector whose social objectives are met by its commercial functioning. But for this, there is need for selectivity and a strategic focus. It is pledged to devolve full managerial and commercial autonomy to successful, profit-making Companies operating in a competitive environment. Generally, profit-making Companies will not be privatised. All privatisations will be considered on a transparent and consultative case-by-case basis. The existing “Navaratna” companies will be retained in the public sector while these companies raise resources from the capital market. While every effort will be made to modernize and restructure sick public sector companies and revive sick industry, chronically loss-making companies will either be sold-off, or closed, after all workers have got their legitimate dues and compensation. The Government will induct private industry to turn around companies that have potential for revival. The Government believes that privatisation should increase competition, not decrease it. It will not support the emergence of any monopoly that only restricts competition. It also believes that there must be a direct link between privatisation and social needs – like, for example, the use of privatisation revenues for designated social sector schemes. Public sector companies and nationalized banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors.”
DISINVESTMENT
Economics
DISINVESTMENT
Economics
CENTAUR, JUHU BEACH
A true-blue 5 star Deluxe, the Centaur Juhu rises sphinx like from the golden sands of Mumbai's famous Juhu beach. Shaped like a luxury liner, the hotel nestles between the city and the rapidly developing industrial belt of the suburbs.
Disinvestment of the hotel/flight kitchens of the Hotel Corporation of
India, a subsidiary of Air India, was initiated by Air India under the supervision of the Ministry of Civil Aviation. A Sub-Committee of the Board of Air India was constituted by the said Board to oversee the disinvestment process. On the basis of the Sub-Committee's recommendation, Air India appointed M/s Jardine Fleming Securities India Ltd. (currently known as M/s JP Morgan India Pvt. Ltd) as Global Advisors on June 6, 2000. An advertisement inviting Expressions of Interest from the prospective bidders was issued by Air India on October 11-12, 2000 for all the businesses of the Hotel Corporation of India including Centaur Hotel, Juhu Beach, and Mumbai. The Sub-Committee, with the assistance of the Global Advisors, accomplished: (i) (ii) (iii) (iv) (v) (vi) Finalisation of the transaction structure of selling the individual businesses on slump sale basis; Finalisation of the Confidential Information Memorandum; Shortlisting of bidders; Appointment of Legal Advisors and Asset Valuers; Conducting data room study and due diligence by the bidders; and Finalisation of transaction documents.
On 27th September 2001, based on a Government decision, the Department of Disinvestment took over the process of disinvestment in Hotel Corporation of India. After taking over the process, Department of Disinvestment constituted an Inter-Ministerial Group and adopted the transaction structure and transaction documents as finalized by Air India.
DISINVESTMENT
Economics
For the five businesses of Hotel Corporation of India that were offered for sale, the Qualified Interested Parties had already been identified. In respect of Centaur Hotel Juhu Beach, Mumbai, Expressions of Interest were received initially from 20 parties of whom three were found to be ineligible. Of the remaining 17 Qualified Interested Parties, 16 did not furnish the prescribed Expression of Intent Letters along with the Earnest Money Deposit of Rs. 5 lakhs, thereby withdrawing themselves from further participation from the disinvestment process. Therefore, there was only one Qualified Interested Party. On 24th October 2001, the Global Advisors addressed the Qualified Interested Party, viz., namely, M/s Tulip Hospitality Services Ltd asking it to submit its price bid on 6th November 2001. M/s Tulip Hospitality Services Ltd submitted its price bid on 6th November 2001. An Evaluation Committee comprising the concerned Joint Secretaries of the Ministry of Civil Aviation and the Ministry of Disinvestment and the Managing Directors of Air India and Hotel Corporation of India under the chairmanship of the Joint Secretary & Financial Advisor, Ministry of Civil Aviation met on 8th November 2001. After detailed consideration of the asset valuation report prepared by the Asset Valuer (M/s Kanti Kararnsey & Co., Mumbai), the valuation report prepared by the Global Advisor and the merits and demerits of the various methods of valuation adopted by them and the then prevailing market conditions, the Evaluation Committee determined the reserve price for Centaur Hotel Juhu beach Mumbai at Rs. 101.60 crores. The price bid, which was in a sealed cover, was thereafter opened by the Evaluation Committee on 8th November 2001. The bid was for Rs.153.00 crores. The Evaluation Committee recommended for acceptance the financial bid submitted by M/s Tulip Hospitality Services Ltd of Rs.153.00 crores for Centaur Hotel Juhu Beach, Mumbai, since it was above its determined reserve price. The Inter-Ministerial Group, in its meeting held on 9th November 2001, accepted the recommendation of the Evaluation Committee. The recommendations of the Evaluation Committee/InterMinisterial Group were accepted by the Core Group of Secretaries on Disinvestment on 9th November 2001 and by the Cabinet Committee on Disinvestment on 10th November 2001. Initially, Air India proposed to execute the Agreement to Sell by 21st December 2001 and notified M/s Tulip Hospitality Services Ltd. However, M/s Tulip Hospitality Services Ltd made a series of representations from time to time, seeking extensions for conclusion of the transaction. Three extensions were given to M/s Tulip DISINVESTMENT
Economics
Hospitality Services Ltd, the last being on 23rd February 2002. These extensions were given apparently with the view to complete the sale of Centaur Hotel, Juhu Beach, Mumbai at a price of Rs.153 crores, which was above the reserve price of Rs.101.60 crores. Since some concerns had arisen with respect to M/s Tulip Hospitality Services Limited's ability to meet the financial obligations under the transaction, a decision had been taken on 21st February 2002 to invoke the Bank Guarantee of M/s Tulip Hospitality Services Limited and to terminate the deal. However, the Chairman, M/s Tulip Hospitality Services Limited met the then Minister of Disinvestment on 22nd February, 2002, and sought an opportunity to demonstrate M/s Tulip Hospitality Services Limited's intent to complete the transaction by producing his consortium of bankers before the Minister. On 23rd February 2002, M/s Tulip Hospitality Services Limited and the consortium of bankers, which consisted of both public sector banks and private banks, met the then Minister of Disinvestment and committed to finance the sale transaction by 9th March, 2002. On this commitment, a further extension was granted on 23rd February, 2002, until 9th March, 2002. Since, 9th March, 2002 was a Saturday, high value clearing did not take place and, consequently, the transaction was completed on 11th March 2002. The business was transferred to M/s Tulip Hospitality Services Limited on 31st May 2002 on completion of transaction formalities. As per the transaction Agreement, M/s Tulip Hospitality Services Limited was bound to offer a Voluntary Retirement Scheme to the employees of the hotel by 30th May, 2003. Anticipating that the management might not offer the Scheme in time, the Officers' Association filed a writ in the Bombay High Court on 9th May, 2003 itself. On the directions of the High Court, M/s Tulip Hospitality Services Limited introduced a Voluntary Retirement Scheme on 1st October, 2003. Since this was not fully acceptable to the Association, it approached the High Court again. However, the High Court did not give any further relief. Thereafter, on 1st July, 2004, the Association moved the matter before a Division Bench of the Bombay High Court. While the matter is before the Division Bench, the Officers' Association and the management have come to an agreement on all critical issues on 6th August, 2004. On the basis of this agreement, M/s Tulip Hospitality Services Limited filed an affidavit before
DISINVESTMENT
Economics
the Bombay High Court on 12th August, 2004. The case now stands adjourned to 10th January 2005. It looks odd that it was a single bidder transaction. It further looks odd that the Discounted Cash Flow method of evaluation was adopted in this case. We do not think that this method is the only method, or the most appropriate method of evaluation in all cases. It further looks odd that so much indulgence was granted to the bidder by way of not invoking the bank guarantee, which was ordered twice, and by way of granting him repeated extensions. We personally think that as a result of its disinvestment zeal, the then Government overlooked some discomforting aspects of this transaction. The agreement does not permit the resale. The matter is now sub judice before the High Court of Bombay regarding the Voluntary Retirement Scheme. But, if there is a violation of agreement, certainly the Ministry of Civil Aviation will be advised to take necessary action.
DISINVESTMENT
Economics
CENTAUR, AIRPORT HOTEL
I
t was an announcement that shocked even the overzealous minister for
disinvestment, who believes nothing can go wrong with his high profile drive to sell public properties at a rapid pace. On October 18, 2002, Batra Hospitality Pvt Ltd announced that it had sold Centaur Airport Hotel at Mumbai to the Sahara India group for a sum of Rs 115 crores. What was reported as a routine commercial transaction by A L Batra of Batra Hospitality has triggered a controversy that is likely to prove extremely embarrassing to the government. This was because the Airport Centaur had been acquired by Batra from the Air India subsidiary Hotel Corporation of India (HCI) for a sum of just Rs 83 crores, barely six months back. At that time, this sale of Airport Centaur (along with the Centaur Hotels in Juhu and Rajgir) was presented as one more case of the highly successful and transparent, accelerated disinvestment drive that Arun Shourie had launched.
THE issue of resale of the disinvested Mumbai airport Centaur hotel at a premium of Rs 32 crores was raised on by an independent panel that included CPI (M) Member of Parliament, Mr. Dipankar Mukherjee. Addressing a press conference here, Mr. Mukherjee said that the "links" between Batra Hospitality that bought the hotel and resold it at a substantial premium, and former Prime Minister, Mr. Atal Bihari Vajpayee's son-inlaw, Mr. Ranjan Bhattacharya, should be probed by the Central Bureau of Investigation (CBI). Terming Batra Hospitality as a "shell company" that "did not have the financial strength or experience in running a hotel," Mr Mukherjee said the hotel was sold to it because of its owner's experience in running Delhi's Radisson Hotel through AB Hotels Ltd. "Are these links coincidental, incidental or accidental? We are not putting anyone in the dock. What we want is that the CBI should investigate and DISINVESTMENT
Economics
expose the entire scam," Mr Mukherjee said at a press conference in which the CPI (M) General Secretary, Mr Prakash Karat, was also present. Mr. Karat said he was only a "facilitator" for the three-member panel headed by Mr. Mukherjee, which looked into the matter. Other members of the panel were Supreme Court lawyer, Mr. Prashant Bhushan, and journalist, Mr. Paranjoy Guha Thakurta, who were also present at the press conference. Referring to reports quoting CBI that it was not finding much material to proceed with the probe into the Airport Centaur deal, Mr. Karat said, "We are releasing this material in public interest and to help the Government and CBI proceed in this matter." Yielding to demands of the Left parties, the Congress-led UPA Government on Friday announced an inquiry into the controversial sale of two stateowned Centaur Hotels in Mumbai in view of severe criticism made by the Comptroller and Auditor General (CAG) of the then BJP-led NDA Government for undervaluation of the hotels. After examining CAG’s report, the government decided to order an inquiry, Finance Minister P Chidambaram announced in both the Houses of Parliament. The nature and scope of enquiry would be announced in due course, he said in a brief suo motu statement. Significantly, when this announcement was made, the Opposition NDA was not present as it was boycotting Parliament. The Finance Minister’s statement was necessitated by persistent demands of the Left parties that the government should order an inquiry by the CBI into the sale of Centaur Juhu and Centaur Airport Hotels.
The CAG in its report had pulled up the Disinvestment Ministry under Arun Shourie during the previous NDA Government for undervaluation and sale of the hotels without the benefit of competition. It had concluded that assumptions made during valuation of the properties and fixation of reserve price was not consistent with the practice followed by the Ministry in other cases. The CAG even noted various relaxations allowed to the bidder and DISINVESTMENT
Economics
interventions by the Ministry to facilitate sale that indicated inadequate efforts to mitigate the risk of transaction. The efforts made to balance the need and urgency to sell the properties and to obtain the best possible price were also not evident, it had stated. Mr. Shourie had said that the Disinvestment Ministry did no wrong and that he was prepared to face any inquiry.
BHARAT HEAVY ELECTRICALS LIMITED
The Company's principal activities are to manufacture and distribute
electrical, electronic, mechanical and nuclear power equipment. The Company operates under two segments: Power sector and Industry sector. Power sector includes products and services relating to power generation sets and its auxiliaries. Industry sector includes products and services relating to transportation and transmission, electric machines, industrial sets and DG sets, telecommunications and other industrial products and systems. The plants of the Company are located in, Ranipet, Goindwal, Jagdishpur, Tiruchy, Rudrapur, Hyderabad, Bangalore and other places
DISINVESTMENT
Economics
Employees: 43952
Bharat Heavy Electricals Limited
Ticker: 500103 Exchanges: BOM 2004 Sales: 80,190,000,000 Major Industry: ELECTRICAL Sub Industry: MISCELLANE OUS ELECTRICAL Country: INDIA
BHEL DISINVESTMENT
E
very policy decision taken by the UPA Government must draw its
sustenance from the Common Minimum Programme (CMP) adopted by the alliance partners, the yardstick that has also to be applied to the BHEL partial disinvestment case. DISINVESTMENT
Economics
This specific issue has been brewing for quite some time, and every time a decision was seen to be imminent it was shelved for consideration later. On Thursday, the Manmohan Singh Government went ahead with the decision to sell 10 per cent of government equity which has, expectedly, set the cat among the pigeons as it were. According to reports, a statement issued by the CPI(M) said: "BHEL is a navratna public sector unit which is making significant profits in a competitive environment. BHEL significantly contributes to strengthening of India's economic self-reliance. The CMP, on whose basis this Government is meant to function, clearly states that the UPA will encourage and strengthen the navratnas to become global players. The CMP also categorically states that the Government shall not disinvest/privatize the profit-making PSUs. In the light of these commitments made in the CMP, the CPI(M) considers the Cabinet decision contradictory." Apart from the fact that the Finance Minister himself has said that the Left was "consulted" before the decision was taken, Government "managers" have been reported as saying that the step had been taken in accordance with the norms contained in the CMP. To quote them (as reported): "The CMP is very clear. It has only said that `generally' profit-making PSUs will not be privatised. In any case, even after the decision, 58 per cent stake will remain in Government hands. Besides, the CMP has said that all privatisation will be considered on a transparent and consultative case-by-case basis. It has also said that navratnas will be allowed to raise resources from the capital market". What does the CMP itself have to say on the subject? To quote the relevant portion of the Programme: "The UPA Government is committed to a strong and effective public sector whose social objectives are met by its commercial functioning. But for this there is need for selectivity and a strategic focus. The UPA is pledged to devolving full managerial and commercial autonomy to successful, profit-making companies operating in a
DISINVESTMENT
Economics
competitive environment. Generally, profit-making companies will not be privatised". The document continues: "All privatisation will be considered on a transparent and consultative case-by-case basis. The UPA will retain existing `navratna' companies in the public sector, while these companies raise resources from the capital market. It also believes that there must be a direct link between privatisation and social needs — like, for example, the use of privatisation revenues for designated social sector schemes. Public sector companies and nationalised banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors." As far as encouragement to "retail investors" is considered, the Government has been careful enough to split the stock offered for disinvestment so that a portion is reserved exclusively for the average citizen. The details of the split-ratio are to be announced later "in consultation with the Departments of Disinvestment and Heavy Industry" and after the choice of the lead manager. As regards the expenditure of the proceeds on "social needs", the Government has said that three-quarters of the funds (around Rs 2, 200 crore) will be spent on health and education, the remaining 25 per cent going into the revival of ailing PSUs. Most important, the disinvestment proceeds will not be reflected in the Budget, a euphemism for the disappearance of the funds into the bottomless and colourless pit of the Consolidated Fund of India. This is all very good, above board, and so on, but the basic issue appears to be whether the 10 per cent of government equity which will be put up for sale could have been leveraged to make BHEL even stronger and more effective, furthering the objective of making the company even more profitable in the highly competitive business world of today. This is the issue that needs to be gone into in some depth because what the 10 per cent sale decision could in fact mean is that BHEL's long-term strategic interests have been sacrificed in the interests of garnering a few
DISINVESTMENT
Economics
thousand crores rupees today, which may or may not be utilized effectively, and in any case will not help the company in any way.
THE MOST PROMINENT DISCUSSION
: Why is privatisation important to India? Arun Shourie: Because we have some 240 public sector companies in the central government and about 1,000 in the state governments, and they're not doing well. The average rate of return from the central DISINVESTMENT
Economics
government enterprises is only about 4 per cent, when the government itself borrows at 10-11 per cent. And, worse than that, if you take away the areas in which the government has a monopoly, like petroleum, then the rate of return is minus 4 per cent. All efforts to revive these companies have not really succeeded. Bringing in aggressive private partners is the best way to make them more competitive. Q: How would you rate your own progress so far in pushing ahead with privatisation? A: In the last ten months, we have completed 18 transactions - which is pretty big. My aim is to get privatisation off the front pages. It should become a routine affair. We have successfully explained our position on privatisation in 10 debates in Parliament lasting nearly 80 hours. We have answered about 600 parliamentary questions. We have thwarted 19 challenges in the courts and ultimately received the strongest endorsement from the Supreme Court of India, which says that the process being followed is completely transparent, just and fair. So we've made great progress. Q: How about your performance vis-a-vis financial targets the government has set for receipts from privatisation? A: I don't work on the basis of financial targets. Some such targets have been mentioned by the finance minister in his Budget. But those are approximations. And even he agrees that we can't just go on the basis of those targets, because then we will be accused of making distress sales. We are laying the foundations of a process that is going to last 10 years, so we must be very thorough about this. We are satisfied at the pace at which we are working. Q: What about the quality of the assets on sale? It is alleged that a lot of them are junk. What is your comment? A: I don't think so. Some are junk if you do nothing with them and persist with them as they are. But when investors see that there is now the real prospect of bringing in aggressive private partners to run these companies, it's a different story. Note that it's the stocks of government-related companies that have led the remarkable recent turnaround in the Indian stock market. And we can take credit for unlocking the hidden value in some of these companies.
DISINVESTMENT
Economics
Q: What assets do you believe would be of interest to Singapore investors? A: The assets are across the spectrum - from mines and metals to telecoms, to many others. There was a very good prospect in aviation, but I won't be reviving that very soon. Q: Why not? A: Well both sides missed out an a very fine opportunity. India certainly missed out. And Singapore, because it was a very orderly society, was not used to the very high-decibel of debate in India. I was counselling them: just wait for 15 days. But then, they started looking at other prospects such as Ansett Airlines. And since then, the aviation industry itself fell into uncertain times. So I think it's best to first strengthen our aviation enterprises - both domestic and foreign - before looking for strategic partners. Q: What lessons has India drawn from the experience of Singapore Airlines attempts to buy into Air India? A: I think the main lesson should be drawn by the people who participate in our public discourse and public life. It is that we need better partners who will change the work culture of our enterprises. And if we scare them away with our shouts then we loose. They may just lose a business opportunity, but we lose an opportunity to improve our work culture. I mention this in Parliament when the shouting was going on. I said: " You are scaring away bidders." And when that actually happened, I told them: " I told you so." Q: And is your message getting through? A: I think so. In the last 15 privatisations, there have been hardly any criticisms, just some pro-forma noises. Maybe when the next Parliament session starts on 15th there will be some shouting but I feel we are getting the message through. We are especially getting through to labour, which used to be instigated by others who scared them by saying:" You will loose your jobs." But labour is actually finding out that privatisation is the best way for their enterprises to survive and become more competitive. The new owners and partners have entered into long term wage agreements with workers. Wages have increased in some cases, by more than 20 per cent. Q: Where are the main obstacles you face?
DISINVESTMENT
Economics
A: The main obstacles we face are similar to what the US and Europe face with agricultural subsidies. Only 3-4 per cent of population depends on these subsidies, but a politics and a discourse congeals around the issue. That's our main difficulty. Second, in India, we have a fractured electorate and fractured legislatures, so everybody has power to block anything, and not many people have enough power to push things through. But that problem will be alleviated in coming months because state governments are now on the brink of beginning privatisation of their own enterprises. So if they do it in their states, they can't oppose it at the centre. Q: But don't you have opposition from even within your own party? A: Well, yes, because every party is diverse and everybody has an opinion, But in one or two years, with fifty enterprises privatised and the results visible, this opposition will subside. It is important to remember that in India, when a reform is first proposed, there is a lot of shouting. But than two years later, after it has been introduced and gone through, nobody even noticed it. Q: Can you give an example of this? A: When India was to sign the convention on intellectual property rights, there was a lot of opposition. But it was signed, and now nobody shouts. Then, on allowing foreign companies into the insurance sector, there was again a lot of shouting. But now, foreign firms have come in, and many people don't even know this. So it is with privatisation. If you ask the original opponents "How many enterprises have been sold in the last ten months?" I don't think they will come up with a figure close to eighteen. Q: Are their benefits from privatisation that you can already point to? A: Take the case of Modern Foods, which makes bread. Its sales are about ninety per cent higher than just a year ago. Workers average pay has increased. The plants are hygienic. In the case of Balco (Bharat Aluminium Company), an expansion programmme of 3000 (three thousand) crore rupees (S $1.05 billion) has been announced. Not a single worker has been retrenched. A five year wage agreement has been entered into, which provided for an immediate twenty percent increase in the basic wage. Q: What privatization process are you following?
DISINVESTMENT
Economics
Disinvestment from 1991-92 to 2004-05, the methodologies adopted
A: The initial approach was to unload some government shareholding, in the form of minority stakes. But this was not changing the work culture or the managements of enterprises. So now, the government is going in for strategic partners and, in some cases, outright sale. We are willing to relinquish majority control in all but a few strategic industries like defence, atomic energy and railways. We have also now introduced an element in which, let’s say the government maintains 26 per cent equity in the first round. But if the enterprise starts to do really well, the government exits even sooner. Q: Over what time frame do you hope to complete India’s privatization, and what will satisfy you that it has been a success? A: I have studied 14 countries privatizations, and they have lasted 10-17 years. I would expect India’s privatization to last 10 years or so. It will gather momentum and become a routine affairs. I have been pushing for it for 30 years. I will fill vindicated when a process is in place – as it is now- and when there is not a single allegation of corruption or wrongdoing. I have said many times in Parliament that if you want to make any allegation like this, make it outside the legislature and I will sue you in court. And now, those very persons who made such allegations last year are saying: “Oh, but I never opposed privatization.”
DISINVESTMENT
Year
No. of transac tions in Target receipt which (Rs. in Crore) equity sold
Actual Economics receipts (Rs. in Crore)
Methodology
1991-92
47
2500
Minority shares sold in Dec 1991 and Feb 3037.74 1992 by auction method in bundles of "very good", "good" and "average" companies 1912.42 Shares sold separately for each company by auction method. Equity of 6 companies sold by open auction but proceeds received in 94-95.
1992-93
29
2500
1993-94
-
3500
0.00
1994-95
17
4000
Sale through auction method, in which NRIs 4843.10 and other persons legally permitted to buy, hold or sell equity, allowed to participate. 168.48 Equities of 4 companies auctioned 379.67 GDR (VSNL) in international market. 910.00 GDR (MTNL) in international market. GDR (VSNL) / Domestic offerings with the participation of FIIs (CONCOR, GAIL). 5371.11 Cross purchase by 3 Oil sector companies i.e. GAIL, ONGC & IOC GDR—GAIL, VSNL-domestic issue, 1860.14 BALCO restructuring, MFIL’s strategic sale and others 1871.26 Strategic sale of BALCO, LJMC; Takeover KRL (CRL), CPCL (MRL), BRPL
1995-96 1996-97 1997-98
5 1 1
7000 5000 4800
1998-99
5
5000
5
10000
2000-01
5
10000
2001-02 #
8
Strategic sale of CMC – 51%, HTL –74%, VSNL – 25%, IBP – 33.58%, PPL-- 74%, DISINVESTMENT 12,000 5632.25 and sale of hotel properties of ITDC & HCI; receipt from surplus cash reserves from STC
Economics
# Figures are inclusive of control premium, dividend/dividend tax, restructuring and transfer of surplus cash reserves prior to disinvestment.
Realisation through strategic sale during 1999-2000 to 2004-05
Sr. No Name Percentage of Government Equity sold Realisation Rs. in crore Profit/Loss Making during the year of disinvestment Loss Making
1 a. Modern Food Industries (India) Ltd. (MFIL) 1 b. (MFIL) Phase II 3a. 3b 4 5. CMC Ltd. CMC Ltd. HTL Lagan Jute Machinery Corporation ITDC-19 HOTELS 6. Hotel Agra Ashok
74
105.45
25.995 51
44.07 152 6.07 Profit Making
74 74
55 2.53
Profit Making Loss Making
89.97 DISINVESTMENT
3.61
Loss Making
Economics
7 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.
Hotel Bodhgaya Ashok Hotel Hassan Ashok TBABR Mamallapuram Hotel Madurai Ashok Hotel Ashok Bangalore * Qutab Hotel, New Delhi Lodhi Hotel, New Delhi LVPH, Udaipur Hotel Manali Ashok KABR, Kovalam Hotel Aurangabad Ashok Hotel Airport Ashok, Kolkata Hotel Khajuraho Ashok Hotel Varanasi Ashok
89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97 89.97
1.81 2.27 6.13 4.97 39.41 34.46 71.93 6.77 3.65 40.39 16.50 19.39
Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making Loss Making
19. 20.
89.97 89.97
2.19 8.38
Loss Making Loss Making
DISINVESTMENT
Economics
21. 22.
Hotel Kanishka, New Delhi Hotel Indraprastha , New Delhi Chandigarh Hotel project Hotel Ranjit, New Delhi HCI - Centaur Hotel Juhu Beach, Mumbai HCI-Indo Hokke Hotels Ltd.(Centaur Rajgir) HCI - Centaur Hotel Airport, Mumbai IBP Co Ltd Videsh Sanchar Nigam Ltd. Paradeep Phosphates Ltd. Hindustan Zinc Ltd.
89.97 89.97
92.37 43.39
Loss Making Loss Making
23. 24. 25.
89.97 89.97 100
17.27 29.28 153
Loss Making Loss Making Loss Making
26.
100
6.51
Profit Making
27.
100
83
Loss Making
28. 29.
33.58 25
1153.68 3689
Profit Making Profit Making
30. 31 (a) 31 (b)
74 26
151.70 445
Loss Making Profit Making
Hindustan Zinc Ltd.
6.19
DISINVESTMENT
Economics
31 (c) 32 33.
Hindustan Zinc Ltd.
18.92
323.88
Maruti Udyog Ltd. Indian Petrochemicals Corporation Ltd. State Trading Corporation of India MMTC Ltd. Jessop & Co Ltd Grand Total
4.2 26
1000 1490.84
Profit Making Profit Making
34.
40
35 36
60 72 18.18 10257.19 Loss Making
DISINVESTMENT
Economics
DISINVESTMENT
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