disinvestment synopsis imp (1)

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DAYALBAGH EDUCATIONALINSTITUTE

SYNOPSISPRESENTATION

ON

COMPARATIVE ANALYSIS ON

PRE AND POST DISINVESTMENT

SCENERIO IN GAIL

Research Supervisor:-Submitted by:-

Dr. P. D. Saini SaritaGautamFaculty of commerce 082058

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D.E.I B.Com5th Sem.

THE IMPACT OF DISINVESTMENTON FINANCIAL PERFORMANCE OF

GAIL

{ Pre and Post Scenerio}

INTRODUCTION

Disinvestment was conceived in the context not only of the acute financialstringency of the Government of India, which had to continually providebudgetary support to Loss-making units, but also of the failure of public sectoras a whole to provide a reasonable rate of return on the total investments in240 undertakings. Its aim was to break away from the regime of dysfunctionalbureaucratic mismanagement and inefficiency of the public sector. The processwhich commenced in 1992 with the selling of equity of select PSUs has nowgained momentum and the companies have been put on sale. The poorperformance of the PSUs has always been attributed to the bureaucraticcontrol of Government in these units and disinvestment is thought out to be itsprescription.

Investment and disinvestment are two sides of the same coin. When we dealwith the investment management, it automatically encompasses disinvestmentalso, as what is investment for one is disinvestment for another, particularly inthe secondary market. It investment is an art and science, the more so is thedisinvestment process.

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What is DisinvestmentInvestment refers to conversion of money or cash into securities, debentures,bonds or any other claims on money. At the same time, disinvestment involvesthe conversion of money claims or securities into money or cash.

A reduction in capital investment reflected by a decrease incapital goodsanda company's decision not to replace depleted capital goods.

The saleor elimination of a department, subsidiary, or any other majorinvestment.Disinvestment is most common when a company must raise capital quicklyto finance new operations or pay a certain liability, or when it determines that theinvestment is unlikely to become or remain profitable in the future.

In most contexts, disinvestment typically refers to sale from the government, partly or

fully, of a government-owned enterprise.

A company or a government organisation will typically disinvest an asset either as astrategic move for the company, or for raising resources to meet general/specific needs.

In this direction, the Government adopted the 'Disinvestment Policy'. This was identifiedas an active tool to reduce the burden of financing the PSUs. The following mainobjectives of disinvestment were outlined:

To reduce the financial burden on the Government To improve public finances

To introduce, competition and market discipline To fund growth To encourage wider share of ownership To depoliticise non-essential services

Disinvestment of Public sector undertakings

Disinvestment is a wider term extending from dilution of the stake of thegovernment to a level where there is no change in the control to dilution that

results in the transfer of management. The transfer of ownership may occurwhen in an enterprise the dilution of government ownership is beyond 51percent. The disinvestment implies that the government will sell to public orprivate enterprises / public institutes part of its holding in public sectorenterprises.

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Problems of Public sector undertakings

The most important criticism levied against public sector undertakings hasbeen that in relation to the capital employed, the level of profits has been toolow. Even the government has crticised the public sector undertakings on this

count. Of the various factors responsible for low profits in the public sectorundertakings, the following are particularly important :-

i. Price policy of public sector undertakingsii. Under utilization of capacityiii. Problem related to planning and construction of projectsiv. Problems of labour, personnel and managementv. Lack of autonomy

The government in order to put an end to these problems, decided to disinvestits stake in the PSUs. The companies traditionally established as pillars ofgrowth have now become a burden on the economy. Except few mighty oil and

petroleum companies, almost all other PSUs are incurring losses. The nationalgross domestic product and gross national savings are also adversely effectedby low returns from PSUs. About 10 to 15 % of the total gross domestic savingsare reduced on account of low savings from PSUs.

GAS AUTHORITY OF INDIA LIMITED (GAIL)

GAIL (India) Limited, is India's flagship Natural Gas company, integrating allaspects of the Natural Gas value chain (including Exploration & Production,Processing, Transmission, Distribution and Marketing) and its related services.In a rapidly changing scenario, we are spearheading the move to a new era ofclean fuel industrialisation, creating a quadrilateral of green energy corridorsthat connect major consumption centres in India with major gas fields, LNGterminals and other cross border gas sourcing points. GAIL is also expanding itsbusiness to become a player in the International Market.

10% stakes are sold by Government in the year 2003-04.

REVIEW OF LITERATURE:-

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1. Disinvestment of Indias Public Sector Units:- ByBhole, L.M.

In this study contains the role of state Vs. market in development economiesand policy.

It is also contended that the functioning of many public sector units (PSUs) hasbeen characterized by low productivity, unsatisfactory quality of goods,excessive manpower utilization, inadequate human resource development andlow rate of return on capital. For instance, between 1980 and 2002, theaverage rate of return on capital employed by PSUs was about 3.4% as againstthe average cost of borrowing, which was 8.66%. Disinvestment (ordivestment) of the PSUs has therefore been offered as one of the solutions inthis context.

Disinvestment is generally expected to achieve a greater inflow of privatecapital and the use of private management practices in PSUs, as well as enable

more effective monitoring of management discipline by the privateshareholders. Such changes would lead to an increase in the operationalefficiency and the market value of the PSUs. This in turn would enable themuch needed revenuegeneration by the government and help reduce deficitfinancing.

The actual receipts through disinvestment have often fallen far short oftheir target . During the period 1991-92 to 2002-2003, the government hadtargeted the mobilization of about Rs. 78,300 crores through disinvestment,but it could actually mobilize only Rs. 30,917 crores.

If the disinvestment policy is to be in wider public interests, it is necessary toexamine systematically, issues such as - the correct valuation of shares, the

crowding out possibility, the appropriate use of disinvestment proceeds andthe institutional and other prerequisites.

2.Disinvestment and corporate performance :-byChandawat, D.S., Bhanawat, Shurveer S.andMehta,Ranu

This extension emphasizes the importance of disinvestment on the financial

performance of selected public sector undertakings. This study is anexplanatory research. The impact of management change on the financialperformance, it was desirable to take up those units in which more than 50percent disinvestment has taken place before august 2001. For this studypurpose authors can take the following samples:-

Lagan Jute Machinery Company Limited (LJMCL)

Modern Food Industries (India) limited (MFIL)

Bharat Aluminium Company Limited(BALCO)

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This study shows that the operating performance has deteriorated in the post-disinvestment period as compared to the pre-disinvestment period. Thepreliminary results of the disinvestment experience show that with themovement from public to private led to some improvement in the corporate

performance of the divested units. While the assets utilization and short termliquidity management shows an increase in the efficiency, there has been adecline in the overall profitability of the firms. Moreover the hosts of factorsplaying the role directly or indirectly in the transition phase have to be kept inmind. Nevertheless, the empirical evidence to date seems to give somepositive direction to the process of disinvestment.

3.Disinvestment in India:- By Naib, Sudhir

Twelve years after it was started, the liberalization of the Indian economyremains an ideological and operational battleground. There is mainstreamnational consensus on the need and irreversibility of reformes, but widespreaddisagreement about its pace and the sharing of its benefits. A basic aspect ofthe withdrawal of the state from the economic sphere has been thedivestments to private parties of the shares (and in some cases control) ofpublic sector enterprises (PSUs) or state owned enterprises (SOEs). This hasaffected thousands of Indians and triggered fierce political debates.

The book gives a comprehensive roundup of the why and how of SOEprivatization. It provides a perspective on the past, present and future of PSUdivestment from someone who has studied the process up close. Before thecommentary on the Indian experience, the book touches on the historicaldevelopment of the idea of private enterprise in public works, and the majortheoretical positions on the state versus private ownership debate. It providesa comprehensive review of the disinvestment process followed by India andanalyze the impact of performance of the disinvested enterprises.

4.PUBLIC SECTOR PERFORMANCE SINCE 1950, A FreshLook:- By Nagaraj,R.

The paper elicits that since the mid 1980s the public sectors share indomestic investment has been nearly halved, but its output share hasremained roughly constant at about a quarter of GDP, suggesting a sustainedrise in productivity over nearly two decades.

The paper defines three major evidences for the improvement in performance:-

A rise in physical efficiency in electricity generation.

A fall in public sector employment growth.

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An increase in central public sector enterprises profitability (evenafter excluding the petroleum sector).

The author then goes ahead to question why then the public sector financesremained adverse. In electricity, passenger road transport and railways the

revenue-cost ratio is less than one,and has declined since the early1990s.Moreover, over the last 40 years, the public sector price deflatordeclined by 17 percentage points, relative to the GDP deflator. The authorconcludes that correct pricing and collecting user charges are probably key tosetting public sector finances right.

5.Disinvestment in India, I lose and You gain:-byBaijal ,Pradeep

The process of disinvestment in India has been fraught with challenges andcontroversies. Disinvestment in India:-I lose and you gain, written by one whohas been at the centre of all privatization debates and controversies, brings tolight the facts that surrounds the disinvestment story. It underlines the mostcompelling rationales behind privatization, relief to the tax payer and thesimultaneous need for funds for infrastructure development and social sectorinvestment .This book traces privatization cycles across the globe through ahistorical perspective by looking at the privatization models and processesadopted in different countries. It also includes case studies of companies likeBALCO, Maruti, Hindustan, Zinc, VSNL, Jessop and CMC, providing an insightinto the different aspects of disinvestment.

This book discuss the impact of privatization and disinvestment on companies,economies and other stake holders and serves to initiate a healthy and wellinformed debate on the basis of fact

6.Strategies of Disinvestment-Drawbacks & Evaluation:-by

Kiran,Kranthi

This paper examines the idea or strategies behind what type of disinvestmentis to sell the shares of the government in the public sector enterprises to

external payers. What are the drawbacks of disinvestments. Author has studiedcase on BALCO.

If disinvestment policy is to be in wider public interests, it is necessity toexamine systematically isues such as correct valuation of shares andappropriate use of disinvestment proceeds. The disinvestment of public sectorunits which is , in fact, the public money is done without even due amount ofdebate in the parliament . This, therefore , calls for utmost care and meticulousplanning.

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NEED OF THE STUDY-

The public sector in India at present is at cross roads. The new economic policyinitiated in July 1991, clearly indicated that the public sector undertakingshave shown a very negative rate of return on capital employed. On account ofthis phenomenon many public sector undertakings have become burden to thegovernment. They are infact turning out to be liabilities to the governmentrather than being assets.

This is a sector which the government clearly wants to get rid off. In this

direction the government has adopted a new approach to reform and improvethe public sector undertakings performance i.e 'Disinvestment policy'. This hasgained lot of importance especially in latter part of 90s. At present thegovernment seriously perceives the disinvestment policy as an active tool toreduce the burden to financing the public sector undertakings.Strategies are formulated in the light of objectives, and therefore play animportant role in their accomplishment. An important aspect in themanagement of public sector enterprises is there relevance of the strategicfinancial planning technique in dealing with conflicting objectives.Objectives of public sector enterprises are conflicting because majorityshareholder is the Government. In the case of public ownership, the

management of firms can be regarded as agents acting for the government towhich they are responsible. As compared to private ownership, differencesbetween managers and their immediate principals in public ownership arisefrom following facts:-

(a) Principals do not typically seek to maximize profits.

(b) There are no marketable ordinary shares in the firm, and hence no marketfor corporate control.

(c) There is no direct equivalent of the bankruptcy constraint on financialperformance.

Thus the purpose of the present study is to analyze the impact of change in theownership(reduction in governments ownership) on various financial parameters of a

public sectorcompany.

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OBJECTIVES

1.To study the Pre and Post disinvestment scenario of GAIL.2. To study the effect on financial performance of GAIL afterdisinvestment.

RESEARCH METHODOLOGY

Themethodology of research is based upon case study method. It is themethod of study in depth rather than breadth. In this approach performance ofthe enterprise before disinvestment is compared with its performance afterdisinvestment, attributing any observed change to the disinvestment. For the

purpose of the present study Pre- disinvestment mean value is compared withtheir Post disinvestment Mean value .

COLLECTION OF THE DATA:-

Study is totally based on secondary data.

Secondary Data

Magzines

Internet

Newspaper

Annual reports of GAIL.

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SAMPLE SIZE:-

5 Years after disinvestment.

REFERENCE:-

Bibliography:-

Disinvestment of Indias Public Sector Units:- By Bhole, L.M.

Disinvestment and corporate performance :-by Chandawat, D.S.,Bhanawat, Shurveer S.and Mehta, Ranu

Disinvestment in India:- By Naib Sudhir

PUBLIC SECTOR PERFORMANCE SINCE 1950, A Fresh Look:- ByNagaraj, R.

Disinvestment in India, I lose and You gain:-by Baijal,Pradeep

Strategies of Disinvestment-Drawbacks & Evaluation:-by Kiran,Kranthi

Webiography:-

WWW.CMIE.ComWWW.indianfoline.ComWWW.DIVEST.NIC.IN

WWW.BUSINESS-STANDARD.COM

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http://www.cmie.com/http://www.indianfoline/http://www.divest.nic.in/http://www.business-standard.com/http://www.cmie.com/http://www.indianfoline/http://www.divest.nic.in/http://www.business-standard.com/

disinvestment synopsis imp (1)

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