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Presentation
On
Disinvestment in India
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Government
GOVERNMENT
Private
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Introduction:
Disinvestment refers to the sale or liquidation
of an asset or subsidiary of an organization orgovernment to the private sector.
Privatization:
Privatization means transfer of ownership andor management of an enterprise from the public
sector to the private sector.
The basic difference between the two is that
where in the case of privatization, whole of theequity is sold but in case of disinvestment,
partial equity is sold to the private sector.
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The process of disinvestment means
selling off partially or wholly the assets ofstate owned undertakings to private sector.
Private sector comes to influence or fully
control the management and production
decisions of the firms concerned. It was
first witnessed in Japan in the nineteenth
century.
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Consequently, it sold off most of its industrialpossessions at throw away prices to private
buyers.
To quote economic historian
W. W. Lockwood: They went mainly to certain
big capitalists enjoying official favor and
capable of financing and operating them.
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The new policy of liberalization, privatization
and globalization de-emphasized the role of thepublic sector in the nations economy.
The government must not enter into those areas
where the private sector can perform better.
Market-driven economies are more efficient than
the state-planned economies.
The role of the state should be as a regulator and
not as the producer .
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Government resources locked in commercial
activities should be released for their deployment
in social activities.
It is also contended that the functioning of many
public sector units (PSUs) has been
characterized by:
low productivity, unsatisfactory quality of goods,
excessive manpower utilization,
inadequate human resource development and
low rate of return on capital Disinvestment (or
divestment) of the PSUs has therefore been
offered as one of the solutions in this context.
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Why disinvestment?
Because of the current revenue expenditure onitems such as- interest,payments,wages and
salaries ofGovernment employee and
subsidiaries, the Government is left with hardly
any surplus for capital expenditure on social andphysical infrastructure.
The Government should be spending on
basic education, primary health and family welfare.
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Huge amounts of resources are blocked in
several non-strategic sectors such as hotels,trading companies, consultancy companies,
textile companies, chemical etc.
The Government continues to expose thetaxpayers money to risk, which it can readily
avoid.
This makes disinvestment of the Governmentstake in the PSUs absolutely imperative.
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Objectives:
The primary objectives for privatizing the PSUs are,therefore, as follows:
Releasing large amount of public resources locked
up in non-strategic PSUs, for deployment in areas
that are much higher on the social priority, such as,
basic health, family welfare, primary education and
social and essential infrastructure.
Reducing the public debt that is threatening to
assume unmanageable proportions.
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Releasing other tangible and intangible
resources, such as, large manpower currently
locked up in managing the PSUs, and their time
and energy, for redeployment in high priority
social sectors that are short of such resources.
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Theotherbenefitsexpectedtobederivedfrom
Privatizationare:
Disinvestment would expose the privatized
companies to market discipline, thereby forcingthem to become more efficient and survive or cease
on their own financial and economic strength.
They would be able to respond to the market forcesmuch faster and cater to their business needs in a
more professional manner.
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It would also facilitate in freeing such companies
fromG
overnment control and introduce corporategovernance in the privatized companies.
Disinvestment should result in wider distribution of
wealth through offering of shares of privatizedcompanies to small investors and employees.
Disinvestment would have a beneficial effect on
the capital market.
Help in establishing more accurate benchmarks
for valuation and pricing.
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Argumentsagainst Disinvestment:
1. The amount raised through disinvestment till now
is Rs.42,500 Crores. But the way money realized
by disinvestment is being used remains
undisclosed.
2. Disinvestment of profit making PSUs will rob the
govt. of good returns.
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3. The point that huge manpower will be
released after disinvestment of PSUs which
can be employed in social welfare is wrong
as the growth in social sector is not in
any way hindered by non availability of
manpower.
4. The supporters of disinvestment have
thought that taxpayers money would be
saved by private sector investment.
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Policy:
The main objectives of disinvestment are to putnational
resources and assets to optimum use Policy of
disinvestment specifically aims at:
Modernisation and up gradation of Public Sector
Enterprises;
Creation of new assets ;
Generating of employment; and Retiring of public debt.
.
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ProcedureforDisinvestment:
The procedure followed by Government of Indiafor disinvestment is as follows:
Proposals for disinvestments in any PSU, based
on the recommendations of the Disinvestment
Commission or in accordance with the declared
Disinvestment Policy of the Government, are
placed for consideration of the Cabinet Committee
on Disinvestment (CCD).
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AfterCCD clears the disinvestment proposal,
selection of the Advisor is done through acompetitive bidding process.
After receipt of the Expression of Interest (EOI),
in pursuance ofAdvertisement in newspapers /website, advisors are selected based on
objective screening in the light of announced
criteria / requirements.
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Bidders are invited through advertisement in
newspapers / website to submit their Expressionof Interest.
On receiving EOI from bidders, the advisors, after
due diligence of the PSU, prepare the informationmemorandum in consultation with the concerned
PSU.
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This is given to the short listed prospective
bidders who have entered into a confidentialityagreement. The list of bidders is prepared after
scrutiny of EOIs and those are short listed,
who meet the prescribed qualification criteria.
In case the disinvested PSUs shares are listed
on the Stock Exchange, an open offer would be
required to be made by the bidder before closing
the transaction, as per SEBI guidelines: TakeoverCode.
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Benefitstosmallinvestors:
The small investor who had stake in PSUs has
gained tremendously due to open offer afterstrategic sale in CMC, VSNL, IBP, HZL and IPCL.
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Benefitstoemployees:
In general, security of employment has continued in
the PSUs disinvested so far and no retrenchment
has taken place due to disinvestment. In most of the
companies disinvested,employees have gained byway of raise in pay and allowances. It will lead to
growth in their buying power and therefore growth in
the region.
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Problemsassociated with Disinvestment:
A number of problems and issues have bedeviled the
disinvestment process:
The number of bidders for equity has been small notonly in the case of financially weak PSUs, but also in
that of better-performing PSUs.
The government has often compelled financialinstitutions, UTI and other mutual funds to purchase
the equity which was being unloaded through
disinvestment.
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An important fact that needs to be remembered inthe context of divestment is that the equity in PSUs
essentially belongs to the people.
Inadequate information about PSUs has impededfree, competitive and efficient bidding of shares, and
a free trading of those shares.
Also, since the PSUs do not benefit monetarily fromdisinvestment, they have been reluctant to prepare
and distribute prospectuses.
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By End:
This has in turn prevented the disinvestment
process from being completely open and
transparent.
It is not clear if the rationale for divestment
process is well-founded.
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Thank you!!!
Presented By:
Ankesh Sawrav (08)
Ankur Palia (09)
Avinash Singh (14)Deeghit Chanda(17)
Mohit Sharma (31)