Disinvestments in Indai Processs & Methods

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    Disinvestment in IndiaMethods , Procedures and

    Problems

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    Disinvestment - defined

    Meaning of Investment

    Conversion of money or

    cash into either : - Securities

    Bonds

    Debentures

    Or any other form of money

    Converting

    Money Claims

    Securities

    Into Money orCash

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    Transfer of Government

    Ownership when the dilution

    is beyond 51 %

    Imperative for the Government

    to sell a part of its holdings

    Disinvestment in a p.s.u

    PSUTransfer OfOwnership

    Government

    GovernmentHoldings

    Less than

    51%

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    Objectives in any disinvestment

    ReduceFinancial

    Burden onGovernment

    Improve PublicFinances

    IntroduceCompetitionwith Market

    Discipline

    EncourageWide Share in

    Ownership

    DepoliticizeEssentialServices

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    Governments Strategy

    Meet the growing

    budget deficit

    The Government knew

    that they could make

    more money by sellingoff their assets cheaply

    Faster realization

    value

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    Industries reserved for PSUs since December 2002

    Atomic Energy

    Minerals specified inschedule to atomic Energy(Control of Production andUse) Order, 1953

    Railway Transport

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    Government Policies on Disinvestment

    Government Policies

    Bring down Government equity to 26% or lower

    Restructuring of potential & viable P.S.U

    Close down P.S.U that cant be revived

    Protect the interest of the workers

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    Methods of Disinvestment

    Strategic Sale

    Capital MarketOffer for saleFixed Price / Book BuildingSecondary market / Private Placement

    Reduction in Equity Buy back of Shares

    Conversion of equity into other instruments

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    Other Methods

    Trade Sale

    Asset Sale and Winding up

    Management/Employees Buyout (M/EBO)

    Cross Sale

    Sale through De-merger/Spinning off

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    DISINVESTMENT PROCESS

    2-3 months

    3-6 months

    1 week

    Selection of PSU by MODI

    Approval by CCD

    Formation of IMG & Selection of Global Advisors

    Submission of Expression of Interest

    Submission of Initial Technical Proposal

    Due Diligence / Commercial negotiations

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

    Financial bids

    Selection of strategic partner & signing

    of SHA & SPA

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    Three Methods of valuation

    Discounted cash flow

    Net asset value' approach

    Profit Earning Capacity

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    Problems in Disinvestment process

    Soft Budget constraint

    Policy adopted by thegovernment.

    Multiple Controlauthorities

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    Reasons for Slow Progress

    No clear framework or policy

    Disinvestment used to meet fiscal deficit

    No transparency

    Failure to attract foreign buyers

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    Disinvestment Case Laws

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    BALCOs Disinvestment

    "Sterlite's offer for Balco is more than fair."- Business Wo rld, March 12,

    2001.

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

    - Chattisgarh CM, Ajit Jogi.

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    Fact File

    Top line898 Cr.

    PAT 56 Cr.

    HC 7500

    Sale of 51% stake in Balco

    (Management Control)

    Mines

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    Case for DisinvestmentCompany running on Outdated technology. Cashreserve 500 Cr. not adequate for Modernization

    Share of Operating profit in total Profit

    Impact of Aluminum prices

    Company recovered from state of sickness and henceright time for sale.

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    Bidders for Strategic Stake

    Hindalco (Birla Group)

    Alcoa (US based)

    Sterlite Ind. (Anil Agarwal)

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    Valuation ConundrumValued on 4 Parameters (JP Morgan)Discounted cash flow

    Comparative valuation

    Balance sheet

    Asset valuation

    Control premium added to arrive at reserve price

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    Analysis Paralysis

    Reserve Price fixed at 514 Cr.

    using 25% mark up to the valuations

    arrived by DCF Model

    Hue and cry by Opposition over

    valuation methodology

    Question Earnings Vs Asset

    Value

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    The Verdict

    Sterlite Industriesemerges as thehighest bidderwith an offer of

    551 Cr.

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    Post Sell Out DramaLack of Transparency

    Political Pressure & threats

    Allegations of Under hand deals

    Company wide Agitation, strike

    continued for 67 days

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    Post Sell out Drama

    Threat of damage to

    companys assets

    Supreme Courts role

    Union Management

    Meetings

    Agreement Signed

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    SUGGESTIONS AND REMARKS

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    suggestions

    Clear policy & framework for disinvestment process

    De-link disinvestment with budgetary control

    exercise

    Disinvestment process be audited by at least 2

    reputed auditing firms

    Creation of separate disinvestment fund

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