Download - PSU and Disinvestment
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What is PSU?
In India, public sector undertaking (PSU) is a term
used for a government-owned corporation.
The majority (51% or more) of companies equity is
held by union government or state government.
Divisions of activity in 1956
a)Public sector-Heavy and basic industries which
require high capital and low return.b)Private sectors-Consumer based goods industries
having high and early returns
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Investment of Government in PSU
As on 1 st April No. of units Total
Investment(Crs)
1951 5 29
1956 21 811961 47 948
1980 179 18150
1985 215 42673
1990 244 99329
1992 237 135445
1995 239 164690
2007 247 421089
2008 242 455409
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Performance of Public sectorYears Nos of
PSUTurnover PBIT Net
ProfitDividend
paidContribution to
country
revenue
1991-92 237 133906 13675 2356 687 19951
1995-96 239 226919 27587 9574 2205 30878
2000-01 234 458237 48767 15653 8260 61037
2001-02 231 447529 63190 25978 8068 62866
2002-03 227 535165 73374 32399 13768 818672003-04 230 587052 99053 53084 15288 89035
2004-05 227 700862 109518 65429 20714 110599
2005-06 226 837295 117614 69536 22886 125456
2006-07 217 964410 142949 81550 26805 147728
(Rs.Crs)
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Industries reserved for PSUs since
July 1991
1. Arms and Ammunition and allied items of defence
equipment, defence aircraft and warship
2. Atomic Energy
3. Coal and Lignite
4. Mineral oil
5. Mining of iron ore, gold and diamond
6. Mining of copper, zinc, led, tin and molybdenum.
7. Minerals specified in the schedule to Atomic Energy
(Control of production and use) Order, 1953
8.R
ailway Transport
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Top 10 PSU in India
IOC-20 largest company in the world, most profitablePSU, ranked in Fortune 500 lists
NTPC-India largest power company. contributes to 28.5%
of th
e power to th
e country.
BPCL-3 largest company in India, listed in Fortune 500lists
HPCL-operates the largest lube refinery in India
ONGC-5 largest company ,contributes 77% of Indiascrude oil, 81% of natural gas production
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Top 10 PSU in India
SAIL-6 largest company in India and leading steel producer
BHEL-manufactures over 180 products and caters to core
sector of indian economy
BSNL-Largest telecom industry
HAL-Largest public sector in aeronautical engineering
Bharat Dynamics Limited has made it to the top ten list due
to the sheer grit and diligence that it showcases in its balance
sheet and the profitability that it shows year after years
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Problems of Public sector
Poor Project Planning: Investment decisions in many public enterprises are not based upon proper evaluation of demand
and supply, cost benefit analysis and technical feasibility.
Many projects in the public sector have not been finished according to the time schedule.
Over-capitalization: Due to inefficient financial planning, lack of effective financial control and easy availability of money from
the government, several public enterprises suffer from over-capitalization
The Administrative Reforms Commission found that Hindustan Aeronautics, Heavy Engineering Corporation
and Indian Drugs and Pharmaceuticals Ltd were over-capitalized.
Such over-capitalization resulted in high capital-output ratio and wastage of scare capital resources.
Excessive Overheads: Public enterprises incur heavy expenditure on social overheads like townships, schools, hospitals, etc. In
many cases such establishment expenditure amounted to 10 percent of the total project cost.
Hindustan Steel alone incurred an outlay ofRs. 78.2 crore on townships. Such amenities may be desirable
but the expenditure on them should not be unreasonably high.
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Overstaffing: Manpower planning is not effective due to which several public enterprises like Bhilai Steel have
excess manpower.
Under- utilization of Capacity: One serious problem of the public sector has been low utilization of installed capacity. In the absence
of definite targets of production, effective production planning and control and proper assessment of
future needs many undertakings have failed to make full use of their fixed assets. There is
considerable idle capacity. In some cases productivity is low on account of poor materials
management or ineffective inventory control.
Lack of a Proper Price Policy: There is no clear-cut price policy for public enterprises and the Government has not laid down
guidelines for the rate of return to be earned by different undertakings
Inefficient Management : The management of public enterprises in our country leaves much to be desired.
. Civil servants who are deputed to manage the enterprises often lack proper training
Motivations and morale of both executives and workers are low due to the lack of appropriate
incentives.
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Meaning and Reasons for Privatization
Privatization is a process by which the governmenttransfers the productive activity from the public
sector to the private sector
Improvement in efficiency and performance
Fixing responsibility is easier
Response time incase of Private sector is less
Privatization leads to better services to customers
Remedial measures are taken early in private sector
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Role of Private Sector
1. It lessens the government burden, private company such as water supply,electricity, airport.etc..the money can be spent on development such as publicfacilities..
2. Much efficient and better, private companies tends to collect revenue higher
than the government..that is why the provide the best services.. you will havecleaner water, better telephone lines and reception..etc
3. Privatization provides job opportunity to many people..private companies havebetter pays than government servant, they get better salary and reduces thecountry jobless rate.
4. Increase revenue of the country, as private company pay taxes to the centralgovernment, it helps the government to have more funds for development..suchas foreign invest and etc..
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ROLE OF PRIVATE PUBLIC AND JOINT SECTOR IN
EMPLOYMENT AND GROSS OUTPUT
SECTOR FACTORYNOS
EMPLOYM
ENT(000S)
FIXED CAP
IN CRORES
GROSS
OUTPUT
PUBLIC 13,227 3,107 4,20,767 11,12,91
8
PRIVATE 1,21,113 5,610 1,70,547 7,43,293
JOINT 2,046 269 13,494 42,087
OTHERS 3,775 125 2,132 9,338
TOTAL 1,40,161 9,112 6,06,940 3,11,864
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Problems of Private Sector Profit generation is the main motive
Monopoly and Concentration
Declining share of net value added in total output
Infrastructure Bottlenecks
Industrial Disputes
Industrial Sickness
Threat from Foreign Competition
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Disinvestment in India
What is Disinvestment? The action of an organization or government selling or liquidating an
asset or subsidiary as a strategic move for the company.
Th
e term was first used in th
e 1980s, most commonly in th
e UnitedStates
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Objectives of Disinvestment PSUs had shown a very negative rate of return on capital employed.
Inefficient PSUs had become and were continuing to be a drag on the Governments resources turning to
be more of liabilities to the Government than being assets.
Out of the 239 operating PSUs in 1995-96, 134 were running on profits and as many as 101 were loss
making units, 86 of them were sick.
Many undertakings traditionally established as pillars of growthhad become a burden on the economy.
National gross domestic product and gross national savings also getting adversely affected by low returns
from PSUs.
Of the various factors responsible for low profits in the PSUs, the following were identified as particularly
important:-
Price policy of public sector undertaking
Underutilisation of capacity
Problems related to planning and construction of projects
Problems of labour, personnel and management
Lack of autonomy
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Finally, disinvestment was also seen by the Government to raise funds for
meeting general/specific needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This
was identified as an active tool to reduce the burden of financing the
PSUs.
Few main objectives are:
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
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Different Approaches to
Disinvestments
There are primarily three different approaches to disinvestments (from the
sellers i.e. Governments perspective)
Minority Disinvestment
Majority Disinvestment
Complete Privatisation
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Majority Disinvestment
A majority disinvestment is one in which the government, post
disinvestment, retains a minority stake in the company i.e. it sells off a
majority stake
Eg: Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to
TCS etc.
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Complete Privatisation
Complete privatization is a form of majority disinvestment wherein 100%
control of the companies passed on to a buyer.
Examples of this include 18 hotel properties of ITDC and 3 hotel
properties of HCI.
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Cabinet Committee on
Disinvestment (CCD)
Chaired by the Prime Minister
Functions:
To consider the advice of the Core Group of
Secretaries
To decide the price band
To decide the final pricing
Intervention in case of disagreement between therecommendations
To approve the three-year rolling plan and the annual
programme of disinvestment every year.
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Core Group of Secretaries on
Disinvestment (CGD)
Headed by the Cabinet Secretary
Functions:
Supervises the implementation of the decisions
of all strategic sales
Monitors the progress of implementation of the
CCD decisions.
Makes recommendations to the CCD on
disinvestment policy matters.
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Ministry Of Disinvestment
Set up in 1999
Assisted by Advisors
Business Allocated to Ministry of Disinvestment
1. All matters relating to disinvestment of Central Government equity from Central PublicSector Undertakings
2. All matters relating to sale of Central Government equity through offer forsale or private placement in the erstwhile Central Public Sector Undertakings
3. Decisions on the recommendations of the Disinvestment Commission on the modalitiesof disinvestment, including restructuring.
4. Implementation of disinvestment decisions, including appointment of advisers, pricingof shares, and other terms and conditions of disinvestment
5. Disinvestment Commission;6. Central Public Sector Undertakings for purposes of
disinvestment of Government equity only.
7. Financial Policy in regard to the utilization of the proceeds of disinvestment channelizedinto the National Investment Fund
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Major Issues In DisinvestmentProfitability:
The return on investments in PSEs, at least for the last
two decades, has been quite poor.
The PSE Survey shows PSEs, as a whole, never earned
post tax profits that exceeded 5% of total sales or 6% of
capital employed, which is at least 3% points below the
interest paid by the Government on its borrowings
Recurring Budgetary support to PSEs:
Despite huge investment in the public sector, the
Government is required to provide more funds every
year that go into maintaining of the unviable / weak PSEs
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Cost Control:
As per NCAER Study Report
the cost structure in PSEs is
increasing as compared to
private sector, which is ableto contain costs on all
parameters.
Power & fuel
/Net salesPSEs
Pvt. sector
I9.5
5
Wages/Net
SalesPSEs
Pvt.sector
23.3
6.5
Interest/Net
sales
PSEs
Pvt. sector
11.7
4.7
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Industrial Sickness in PSUs:
To save the PSUs from sickness, the government
has been sanctioning restructuring packages from
time to time.
As on 31.3.00 Profit & Loss A/C of 21 PSUs showed
accumulated loss of 13959.57 crores.
Employee issues:
Of the 1.6 million jobs added in the organized
sector 1 million, or two thirds, were added in the
private sector during the period 1991 to 2000. This indicates that the private sector has become
the major source for incremental employment in the organized sector ofthe economy over the last decade
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HUL Modern Foods
CASE STUDY
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Introduction MFIL was incorporated as Modern Bakeries (India) limited in 1965.
It had 2042 employees as on 31.1.2000
It went through minor restructuring during 1991-94 when its UjjainPlant was closed, the Silchar project was abandoned and the
production ofRasika drink was curtailed.
The company was referred to Disinvestment Commission in 1996. InFebruary 1997, the Commission recommended 100% sale of thecompany, treating it in the non-core sector.
As per the Disinvestment Commission the major problems at MFILwere under- utilization of the production facilities, large work force,low productivity and limited flexibility in decision-making
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The Disinvestment Process
September 1997 The Government approved 50%disinvestment to a Strategic Partner through competitiveglobal bidding
October 1998 ANZ Investment bank was appointed as theGlobal Advisor for assisting in disinvestment
January 1999 The Government decided to raise thedisinvestment level to 74%
April 1999 An advertisement inviting the EOI fromprospective strategic partners was issued
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The Disinvestment Process
In a response to the advertisement 10 parties submittedExpressions of Interest
Out of these, 4 conducted the due diligence of the company, which
included visits to Data Room, interaction with the management ofthe MFIL, and site visits.
October 1999 Post due diligence, 2 parties remained in the field,and on the last day for submission of the financial bid (15.10.99),
the only bid received was that from Hindustan Lever Limited (HLL).
January 2000 - The Government approved the selection of HLL asthe strategic partner in and the deal was closed on 31.1.2000.
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Year Seller Type of sale Buyer Percentage of
Equity Sold
Percentage
of Residual
Equity of
Govt.
Amount
Realised
(Rs.
crore)
1999-00 Modern Food Industries
(India) Ltd.
Strategic sale Hindustan
Lever Ltd.
74 26 105.45
2002-03 Modern Food Industries
(India) Ltd.
Sale of residual
shares to SP
(Put Option by
GoI)
Hindustan
Lever Ltd.
25.995 - 44.07
TOTAL 149.52
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PRIOR TO SALE AFTER SALE
1.
Authorised share capital
Paid up capital
Losses 1998-99
Losses 1999-00**(Inclusive of an amount of Rs.
35.19 cr. towards provisions made
for previous years.) Number ofemployees
Rs. 15.00 cr.
Rs. 13.01 cr.
Rs. 6.87 cr
Rs.48.23 cr **
2042
1. 74% of the shares sold for
Rs. 105.45 cr. and further
Rs. 20 cr. Invested by HLL
in the company.
2
.
Net Worth (and total expected
realisation) as per DPE Survey1998-99
Value of assets as per 31.3.99accounts:
GrossNet
Market value of land & building asper Government valuer
Rs. 28.51 cr.
Rs. 38.76 cr.
Rs. 18.99 cr.
Rs. 109.00 cr.
2. Thus, the Government
gained by selling Rs. 1000shares for Rs. 11,490,
i.e.more than 11 times the
face value & 3.68 timesthe Book Value.
3.
Valuation of 100% equity by
different methods - as done byglobal advisors
Rs. 30 cr. toRs.70 cr.
3. HLL's share value went up
from Rs. 2138 on 30th
Dec. (prior to sale) to Rs.
3247 on 25th Feb. (postsale).
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PRIOR TO SALE POST SALE
. 4. The employees of acompany incurring losses
became HLL employees
- an efficient company.
The Shareholders
Agreement envisages:"
the parties envision thatall employees of the
company on the date
hereof will continue in the
employment of the
company."
5 Company referred to
BIFR, which was
inevitable. Now HLL will
pick up the bill forrestructuring.
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Post Disinvestment Scenario
The decline in the sales of Modern Bread, which continued till the
beginning of 2000, has been arrested. Weekly sales in December
2000 were around 44 lakhs SL, which is a 100% increase over the
figure of April 2000.
As on 31.12.2000, HLL has extended secured corporate loans to
MFIL to the extent ofRs. 16.5 crores for meeting the requirement
of funds for working capital and capital expenditure.
HLL has provided a corporate guarantee to MFIL's banker, viz.,Punjab National Bank, which has helped the Company in getting the
interest rate reduced considerably to the extent of 3-4% of its
earlier borrowing cost.
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Steps have been taken to improve the quality of bread, its packaging andmarketing with trade-promotion activities, and to train the manpower inquality control systems.
November,2002 wages have increased by an average of Rs.1800 peremployee.
Rs. 30 crore has been spent VRS. Rs. 7 crore infused for safety & hygienepurposes at various manufacturing locations
The Government was also entitled to Put its share of remaining equity of
26 % at Fair Market Value for 2 years from 31st January 01 to 30th January03. The Government has exercised this option and thereby received Rs.44.07 crore on 28th November 02.
Post Disinvestment Scenario
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Post Disinvestment Scenario
Despite HULs best efforts MFIL continued to make losses, HUL has
invested 157 crore in MFILs equity
In 2005, its losses were Rs 15 crore and accumulated losses were Rs 79crore.
At th
e operating profit level, before interest and depreciation, it did makea profit though ofRs 22 crore compared to a loss of Rs 7 crore in theprevious year.
Bread sales grew by about 7%. The company suffered as it lost somelucrative government contracts and changed its operational structure.
Hence overall sales declined by 35% to Rs 95 crore.
However, HUL did enjoy tax benefits as MFIL was a sick industrial unit
The company put MFIL on the block in 2006 but failed to clinch a deal
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However, HUL still was unsuccessful in turning around the
business and due to high employment costs and low margins
As per the company,
The culture of MFIL was a complete misfit with its own
The company has committed a mistake while conducting the due diligence
process
Reasons for the Failure
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