psu disinvestment need for guidelines

IINNTTRROODDUUCCTTIIOONN

nitially it was a zephyr, then the sameturned into a turbulent squall. Now it islike a stormy west wind blowing over the

economic canopy of our country - India,; specially whenthe Hon'ble Supreme Court pronounced its historicjudgment in the case of disinvestment of two public sec-tor oil companies BPCL and HPCL. But this gusty andsqually atmosphere, one can be rest assured, will defi-nitely settle down to invite a sunny surrounding on themorrow over the economic ambience of the country.The impact of disinvestment of Central Public SectorUndertakings, i.e. PSUs on the economic fore - fronts of

our country is very much comparable to the atmosphericcondition cited above. Debatably some of us may blow ithot against the Government's policy of disinvestment,while some may blow it cold in its favour but at the heartof our hearts we all know that disinvestment policy isnow sternly ingrained and is very much going to stay. Butwhy this change in the corporate policy of the CentralGovernment? Why the giant PSUs once created withflamboyant publicity and much fanfare to extend maxi-mum social services and safety to the citizen of the coun-try are now treated as colossally monolithic ? It is also feltthat these PSUs, irrespective of their sizes and the sec-tors they belong, are bereft of the dynamics of modernmanagement, lack pragmatism, essence of progress andadoptability, as such can hardly be accommodated in acompetitive economic environment governed by theprinciples of Laissez Faire, regulations of WTO and theconcept of Global Village.

◆ The premise accepted by most of

the high-ups in the top echelon of

the central Government is that the

PSUs, which were once created for

public interest, should gradually be

disinvested in the public interest

only. It is for that reason, they feel,

public exchequer in lieu of funding

the PSUs should better be utilized

for basic education primary health,

family welfare etc. of the country for

which the Government has at pre-

sent hardly any surplus to allocate.

This more so, when a vast amount of

money is already being blocked in

PSUs are in non-strategic sectors in

the form of hotels, consumer good

companies, pharma companies,

consultancy companies’ so on and

so forth

<< EE XX EE CC UU TT II VV EE SS UU MM MM AA RR YY >>

THE CHARTERED ACCOUNTANT DECEMBER 2003608

The author is former President ICWAI The views expressed

herein are the personal views of the author and do not necessarily

represent the views of the Institute.

PSU Disinvestment- Need forGuidelines and Accounting

StandardsHarijiban Banerjee

I

AACCCCOOUUNNTTIINNGG

DDIISSIINNVVEESSTTMMEENNTT OOFF PPSSUU’’ssThe premise accepted by most of the high-ups in the

top echelon of the Central Government is that the PSUswhich were once created for "Public Interest" shouldgradually be disinvested in the "Public Interest" only.The logic and rationale behind such disinvestment pol-icy are therefore, according to them, now stand welldefined and transparent. It is for that reason, they feel,public exchequer in lieu of funding the PSUs should bet-ter be utilised for basic education, primary health, familywelfare etc. of the country for which Government has atpresent hardly any surplus to allocate. This is more sowhen a vast amount of money is already being blocked inPSUs in non- strategic sectors in the form of hotels, con-sumer goods companies, pharma companies, consul-tancy companies so on and so forth. These PSUs are notonly blocking huge public money, but also causing a bigdrain on the public exchequer in the form of Plan andNon-Plan support from the Government for their suste-nance. Moreover, these PSUs, the concerned circle feels,often breed corruption, indulge in inefficiency, adoptfabian tactics and hardly comply with any corporate gov-ernance. When Country's economy is vibrant with"never before so stronger" rupee, "can be proud" posi-tion of foreign reserve, a stimulating capital market, it isunwise to allow huge public funder to get blocked andwasted in the PSUs rather these enterprises should,through disinvestment be handed over to those who arebasically meant for carrying out industrial, trading andcommercial activities of the country. After all it is inaptand rediculous for the Government to become industri-alist, trader or businessman instead of becoming aGovernment itself. Having aforesaid socio-economicdimension in the back-drop the Central Governmentlikes to go by popular maxim "your business is yourbusiness and my business is mine" and wants to disasso-ciate itself with the PSUs through disinvestment policyin a phased manner.

MMOODD -- DDIISSCCOOMM -- DDOODD"With a view to establishing a systematic policy

approach to disinvestment and privatisation and to givea fresh impetus to the Government's disinvestment pro-gramme", the Ministry of Disinvestment (MOD) wasformed on 10th December, 1999. This Administrative

Ministry of Government of India being unique in itsnature has already achieved many distinctions and suc-cessfully disinvested some of the Central PSUs, whichwere once politically sensitive and at the hub of "tense-torn controversy" requiring careful handling of the sub-ject issues. MOD has a professionally managed excellentback-up with up-to-date technical support. Its realisticoutlook, and skilful maneuvering and metamorphiccapability to put disinvestment process of PSUs on fasttrack momentum and to fulfill the Government's objec-tive have been appreciated by the critics also.Disinvestment Commission (Can we not call it DIS-COM ? ) on the other hand is a recommendatory body,which recommends the names of the Central PSUs fordisinvestment after making the required anatomy of themerit of the cases wherever necessary. The commissionalways adopts a dynamic, ductile and amenable attitudein its judgement while referring a PSU for disinvestment.The commission is independent of subjugation fromother Ministries. Currently it consists of five memberswho are very emminent personalities of the country anda Member Secretary representing the Government ofIndia. It is worth mentioning that representation fromStatutory Institutes like ICAI, ICWAI and ICSI in theCommission is conspicuously absent. Department ofDisinvestment (DOD) was earlier shouldering the sameresponsibilities, which MOD has been undertaking.DOD after being headed by a full fledged CabinetMinister is now represented as MOD.

PPRROOCCEESSSS OOFF DDIISSIINNVVEESSTTMMEENNTT--GGUUIIDDEELLIINNEESS//AACCCCOOUUNNTTIINNGG SSTTAANNDDAARRDDSS

As of today the Government's decision to go for dis-investment of its PSUs has created a phenomenal impactover the economy of the country. This is an endeavourby the Central Government to govern the economythrough applied approach thereby bridging the gap ofdeficit financing and gradually do away with control andregulatory measures. Since the process of disinvestmentinvolves a number of complex procedures, it isabsolutely necessary to have standard guidelines forproper accomplishment of various activities at differentlevels. The council of ICAI is perhaps the most appro-priate authority in the country to evolve just and equi-table guidelines and Accounting Standards for the vari-



ous stages of disinvestment to serve the purpose best.Such an action by ICAI will not only be plausive but alsoprove beneficial to the society at large as these will enableto plug in the existing loop holes that do exist in the pro-cedures being followed at present.

The initial steps involved in mooting a proposal fordisinvestment, which may emerge from the policy of theGovernment of India or a proposal made by theDisinvestment Commission and clearance of the sameby the Cabinet Committee of Disinvestment (CCD)incorporate procedural aspects of the Government.Outsiders get involved in the picture when Advisor isappointed generally through paper advertisements."Advisor" does not stand to signify any singular entityrather reputed and established firms of professionals,Consultants, Banks, NBFCs etc. having national andinternational background may qualify for the task. So farthe question of a firm of Chartered Accountants andconsultants is concerned ICAI has enough justifiableprudence and wisdom to issue guidelines on importantand "the must" areas to be covered by the Advisor whilemaking due diligence of the PSU concerned. The sameset of guidelines may also apply when a prospective bid-der would undertake due diligence before bidding for thePSU. PSUs as we all know, are Government Companiesunder the Companies Act, 1956, since the Government,State or Central, holds more than 51% of its equity.Companies Act however, it is interesting to note, doesnot define a PSU nor the same has been defined underany other Act. When shareholding of the Government ina Government Company goes below 51% the Companyloses its entity as a Government Company. But even thenwill it be called a PSU ? Such type of relevant questions inPSU disinvestment should draw the attention of ICAI atthe time of framing the prospective and justified guide-lines to cover these areas.

It is imperative that both the bidding firm, if it is acompany, and the PSU Itself have to comply the require-ments of various Accounting Standards already in vogue.But in many of the PSUs, as is very often experienced,ascertainment of figures with exatitude so far the liabili-ties are concerned are hardly made thereby leaving a vul-nerable scope for hidden liability. Barring a few most ofthe PSUs have huge landed property on which there willalways be an "eagle eye" of the pseudo bidders or "fly-by-night operators", who instead of carrying out the busi-ness will only be interested in asset stripping of the newly

acquired PSU. Invariably a low book value of the assetswill complicate the situation further since PSUs do notenjoy the independence of settling the question ofreceiving the sale proceeds of the assets in "black" or byany other means of that nature. Further, closing ofbranches or sales offices situated in the posh businesslocalities of the various Metros with the plea of cost con-trol is an area of orphic nature which should entice thevigilant eyes of the auditors for proper dissection of eachcase. Since the possibilities of transaction taking an unto-ward, undesirable and wanton turn benefiting someinterested quarters rather than the PSU itself cannot beruled out. Therefore to provide proper safeguard to theGovernment, shareholders, employees of the PSU andto the nation at large, stock of the situation should betaken without further delay and befitting guidelines andstandards be evolved. Then only we shall be able to fulfilour professional commitment to the society.

SSTTRRAATTEEGGIICC SSAALLEE OOFF PPSSUUIn recent times disinvestment through strategic sale

has gained popularity with the Ministry ofDisinvestment since this process helps the Governmentto retain the strategic control of the PSU even though itsday-to-day control of management is transferred to theStrategic Partner. Transaction in strategic sale has twoimportant facets (a) Transfer of block of share to a suit-able Strategic Partner (b) Transfer of management con-trol of the PSU to that Strategic Partner.

It has been earlier observed by MOD that open mar-ket route for disinvestment does not fetch a proper pricefor the PSU because in that case the managementremains with the Government only. Such deprivation ofmanagement control in the PSU deters the prospectivebuyer to own the PSU shares at the justified rates leavingaside the question of payment of premium. As a mode ofsolution to this, sale through strategic route is followed.This involves retainment of minimum 26% of shares ofthe PSU by the Government and relinquishment of restof the share to the other concerned parties in such a wayso that an able responsible and worthful partner can bestrategically selected, who will be sold with atleast 25% ofshares of the PSU. Rest of the 49% of shares will be soldand allocated in such a manner to suit the useful purposeof the Government. The position can be diagrammati-cally explained in the following manner.



When the shareholding of the Union Government ina PSU falls below 51% it loses its entity as GovernmentCompany. Government may hold 51% of shares afterselling 49% to the other parties. Now out of this 51%Government may sell 25% stake to a Strategic Partnerretaining 26% under its own control. Strategic Partner ora consortium, which bids for taking over the PSU may doso through a Special Purpose Vehicle (SPV). SPV is basi-cally a new company formed by the Strategic

Partner/consortium members for the purpose of acquir-ing the shares of the concerned PSU. In order to do so, adocument of agreement called Parent GuaranteeAgreement (PGA) is prepared for execution by the con-cerned parties.

MMAAGGIICC HHOOLLDDIINNGG OORR GGOOLLDDEENN SSHHAARREESSDoing away with the 74% of its share Central

Government however, does not strip itself off with all


Diagram-B

(Acquisition of Share of PSU Through Single Bidding)

Special purpose Vehicle (SPV)

BID for Acquisition of 100% sharesof PSU by Strategic Partner

PSU being Disinvested

StrategicControl

ManagementControl

CentralGovernement 26%

StrategicPartner 25%

Diagram-A

(Acquisition of Share of PSU Through consortium)

Govt. of India (GOI)-26%Strategic Partner - 25%

51%

Special purpose Vehicle (SPV)

PSU being Disinvested

StrategicControl

ManagementControl

CentralGovernement 26%

StrategicPartner 25%

Consortium Member (X) -24%Consortium Member (Y) -15%Consortium Member (Z) -10%

49%


control aspects of the PSU as the percentage 26 has avery significant constituency of control in theCompanies Act, 1956. Through this magic figure of 26%Government can be the most important player in con-trolling the disinvested PSU even after handing over thetotal management of the company to the StrategicPartner, should the situation so warrant. Important deci-sions like Reduction of Share Capital, change in theArticles of Association, winding up of the Company etc.require special resolutions to be passed by atleast 3/4thmajority (75%) in a General Meeting, which the StrategicPartner and other consortium members (holder of 74%)will not be able to do without the Government's partici-pation. Thus by simply holding the magic percentage of26%, which is as worthful as having Golden Shares inhand, Government can now pull the lever of control,when important decisions are required to be taken with-out interferring into the day-to-day management of PSUonce it is disinvested and controlled by the StrategicPartner. Therefore at the end of the deal both the CentralGovernment and the Strategic Partner will be able toexercise Strategic Control and Management Control ofthe PSU separately by holding 26% and 25% of shares ofthe PSU Respectively. This dispenses with the require-ment of holding 51% shares of the PSU at one go by anyparticular party.

TTRRAANNSSAACCTTIIOONN DDOOCCUUMMEENNTTSSTo carry out a strategic sale, transaction documents

like Share Holders Agreement (SHA), Share PurchaseAgreement (SPA) and Parent Guarantee Agreement(PGA) are prepared and executed to take care of the con-cern of the various stakeholders. SHA contains stipula-tions to govern the transfer part of the management con-trol. SPA on the other hand governs the transfer part ofthe shares in the transaction. PGA has different dimen-sion because it is created when the Strategic Partner orthe consortium wants to bid for taking over the PSU byforming another Company in the shape of SPV. PGAcontains "Do's and Don't Do's" for the Strategic Partnervis-a-vis the Special Purpose Vehicle.

NNEEEEDD FFOORR GGUUIIDDEELLIINNEESSAlthough the above documents are supposed to pro-

tect the interest of the Various concerned parties

affected by the disinvestment process no standard set ofprocedures have been recommended for compliance bythe concerned authorities. A transaction of disinvest-ment of any PSU may affect, among others, the follow-ing quarters:

a) PSU itself

b) The Government-Central or State.

c) The employees of the PSU.

d) The Strategic Partner.

e) Other shareholders of the PSU.

f) Various Tax authorities.

g) Suppliers and Customers.

h) SEBI

i) Municipal and Environmental authorities.

The area of involvement being so wide befittingstandards and guidelines must be framed to bring cohe-sion in the text, coverage and contents of the abovedocuments of agreement. Such guidelines must addressthe important issues like protection against assets strip-ping by the Strategic Partner, guarding of employees'interest after disinvestment of PSU, exit option for theGovernment, lock-in-period for the Strategic Partnerand so on. ICAI has always been the pioneer in bring-ing out appropriate guidelines and standards in variousimportant areas for the benefit of both the professionand the end user. Here also we would like to see theICAI as harbinger to enlighten the society with the rayof professional torch of guidelines, so that proper pathleading towards to goal of disinvestment can be madevisible and apprehensive even to the most non-techni-cal man of our country.

Last but not the least, any action of disinvestment ofPSU either by the Disinvestment Commission or theMinistry of Disinvestment will prove more meaningfuland transparent when the Commission or the Ministrywill be having appropriate representation from ICAI,ICWAI and ICSI as these bodies have enough profes-sional expertise, and intelligensia and providential judi-ciousness to give proper guidance on disinvestment notonly to MOD but also to any organisation havingnational and international stature.*

*In the above article, references have been made from various publi-

cations of the Ministry of Disinvestment, which is thankfully

acknowledged.



psu disinvestment need for guidelines

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