DISINVESTMENT IN INDIAN ENERGY SECTOR SUBMITTED BY: NIDHI GOLA DATE: 14 th Jan 2011
CONTENTS: Genesis of disinvestment Definition of disinvestment Types of disinvestment Bodies governing the disinvestment process Disinvestment Policy Valuation of shares The disinvestment process National Investment Fund Disinvestments till date Disinvestment in Energy sector An analysis Benefits of disinvestments Issues in disinvestment process Forthcoming disinvestments Politics of disinvestments Conclusion References 2
GENESIS OF DISINVESTMENT India, for almost four decades was pursuing a path of development in which public sector was expected to be the engine of growth. But by mid-eighties their short comings and weaknesses started manifesting in the form of low capacity utilization, low efficiency, lack of motivation, over-manning, huge time and cost overrun, inability to innovate and take quick decision, large scale political and bureaucratic interference in decision making etc. But instead of trying to remove these defects and to increase the rate of growth of national economy, gradually the concept of self-reliant growth was given a quiet burial. The Government started to deregulate the imports by reducing or withdrawing import duty in phases. This resulted in dwindling of precious foreign exchange reserve to abysmally low level. This was mainly due to large imbalances in internal and external account, making economy highly venerable. There was worsening of fiscal deficit from 1985-86 due to steady increase in govt. expenditure, particularly non- plan expenditure. Fiscal deficit rose to 8.4 % of GDP in 1990-91 and the consequent rise of oil prices further worsened the situation. Erosion of confidence of govt. s ability to manage, led to drying up of the market for external commercial loans. The net outflow of NRI deposits also significantly added to balance of payment crisis. The foreign debt repayment crisis compelled Government of India to raise loan from IMF against physical deposit of RBI gold reserve, on conditions harmful to the interest of the country. Thus, this resulted in genesis of the Industrial policy of 1991 which included the process of delicensing. For except 18 industries, Industrial licensing was withdrawn. The market was opened up to domestic private capital and foreign capital was provided free entry up to 51% equity in high technology areas. The aim of economic liberalization was to enlarge competition and allowing new firms to enter the market. Thus the emphasis shifted from PSEs to liberalization of economy. Also, the gradual disinvestment of PSUs was offshoot of unprecedented macro economic crisis during 1990 1991. DEFINITION OF DISINVESTMENT Disinvestment involves the sale of equity and bond capital invested by the government in PSUs. It also implies the sale of government s loan capital in PSUs through securitization. However, it is the government and not the PSUs who receive money from disinvestment. The process leads only to dilution of ownership and not the transfer of ownership. Privatization refers to transfer of ownership from govt. to private investors. Disinvestment is called Partial Privatization. 3
TYPES OF DISINVESTMENT Strategic sale - This transaction has two elements: o Transfer of a block of shares to a Strategic Partner and o Transfer of management control to the Strategic Partner Offer for sale of equity share to public at large at a pre-determined fixed price. Example: BALCO, IPCL Reduction in Equity o Buy back of shares o Conversion of equity into other instruments Asset Sale and Winding up This is done in the companies that are either sick or facing closure. This is done by the process of auction or tender. Management/ Employee Buyout BODIES GOVERNING THE DISINVESTMENT PROCESS Cabinet Committee on Disinvestment (CCD) A separate Ministry for Disinvestment has been set up by the central government. Also, CCD has been appointed consisting of following members: Minister for Disinvestment, Minister for Industries, and Finance Minister. Disinvestment Commission It was formed by an executive order in August 1996 as an advisory body and not as a statutory commission. It is located in Ministry of Industry and that has led to some difficulties in its smooth functioning. In this light, it was felt that there is a need of a statutory commission. So, the Disinvestment Commission was abolished in November 1999. Department of Public Enterprise (DPE) It was the nodal agency to steer the disinvestment process. The department was responsible for preparing the bundles, advertising the bids and selecting the bidders. Department of Disinvestment After the completion of the tenure of the Disinvestment Commission in Nov. 1999, the govt. made a new Department of Disinvestment. This was done to have a systematic approach to disinvestment and hence gave a fresh momentum to the disinvestment program. Now, the main emphasis is on strategic sale of selected PSUs. 4
DISINVESTMENT POLICY The salient features of the Policy are: (i) Citizens have every right to own part of the shares of Public Sector Undertakings (ii) Public Sector Undertakings are the wealth of the Nation and this wealth should rest in the hands of the people (iii) While pursuing disinvestment, Government has to retain majority shareholding, i.e. at least 51% and management control of the Public Sector Undertakings VALUATION OF SHARES THE DISINVESTMENT PROCESS The fixation of share/bond price is an important part of disinvestment. Several aspects of the company s activities are examined while making a valuation. These could be the past performance of the company, analysis of position of the company in that industry, analysis of inherent strength and weaknesses of the business, forecasting the future performance, impact of the current policy framework and so on. Disinvested shares are listed, quoted examine and traded on the stock market. Indian and foreign financial institutions, banks, mutual funds, companies as well as individuals can buy disinvested shares / bonds. The various methods used for share price valuation are: 1. Discounted Cash Flow (DCF) Method In this method, the all the future cash earnings capacity of the business is projected and then it s present value is calculated by discounting all the earnings by an appropriate discount factor.. This is done using the concept that money has a time value 2. Balance sheet method or Net Asset Value (NAV) This methodology values a business on the basis of the value of its underlying assets. This is relevant where the value of the business is fairly represented by its underlying assets. The NAV method is normally used to determine the minimum price a seller would be willing to accept and, thus serves to establish the floor for the value of the business. This method is pertinent where: a. The value of intangibles is not significant b. The business has been recently set up 3. Transaction multiple method 4. Asset valuation method 5
All the methods (except the Asset Valuation Method) are generally used for valuation of a going concern, whereas the Asset Valuation Method is relevant only for valuation of assets in case of liquidation of a company. In addition to that, in case of listed companies, the market value of shares during the last six months is also used as an indicator. However, most PSU stocks suffer from low liquidity and the price determination may not be always efficient. Moreover, there could be increased trading activity after announcement of the disinvestment, which could be on account of high market expectation of the bid price and even based on mala fide intent. This could lead to the price being traded up to unsustainable levels, which is not desirable. NATIONAL INVESTMENT FUND On 27 January 2005, the Government had decided to constitute a 'National Investment Fund' (NIF) into which the realization from sale of minority shareholding of the Government in profitable CPSEs would be channelized. The Fund would be maintained outside the Consolidated Fund of India. The income from the Fund would be used for the following broad investment objectives:- 75% of the annual income of the Fund will be used to finance selected social sector schemes like APDRP, Mahatma Gandhi National Rural Employment Guarantee Scheme etc., which promote education, health and employment. The residual 25% will be used to meet the capital investment requirements of profitable and revivable CPSEs that yield adequate returns, in order to enlarge their capital base to finance expansion/ diversification. Fund Managers of NIF - UTI Asset Management Company Ltd., SBI Funds Management Company (Pvt.) Ltd. and LIC Mutual Fund Asset Management Company Ltd. were appointed initially as Fund Managers to manage the funds of NIF DISINVESTMENTS TILL DATE The disinvestment announcement was made on 4 th March, 1991 during the interim budget session for 1991-92 under the Chandrashekhar govt. The policy has evolved over the years. This period could be broadly into four phases: 1. First Phase (1991-92 to 1995-96): The disinvestment process started with sale of minority shares in Dec 1991, Feb, 1992 by auction method in bundles of "very good", "good" and "average" companies. In 1991-92, Government disinvested an average of about 8% of the shareholding in 30 CPSEs and realized Rs.3037.74 crore over two auctions. 2. Second Phase (1996-97 to 1997-98): An effort to institutionalize the disinvestment process was undertaken on a firm footing by constituting the Disinvestment Commission. 6
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Rs. '000 Crores 0.39 Crore shares of VSNL and 7 crore shares of MTNL were sold in GDR market realizing a total amount of Rs. 910 crores. 3. Third Phase (1998-99 to 2007-08): Department of Disinvestment (now a ministry) and National Investment Fund was formed. Government sold a small portion of its shareholding in one Central Public Sector Enterprise (CPSE) to another CPSE. Example - Through this mechanism, ONGC and IOC each purchased 4.85 per cent shares of GAIL s equity shareholding. 4. Fourth Stage: The current phase where govt. is planning to sell its stake in IOCL, SAIL and Hindustan Copper Ltd. Findings from the analysis (using the graph below) Till now only 8 times, the govt. is able to achieve the disinvestment targets. In some of the years, govt. failed to achieve even 20% of the target set. Govt. has measurably failed to attract various parties for buying the PSUs. No funds received in 1993-94. Equity of 6 companies sold by auction method in1993-94 but proceeds received in 1994-95. In 2003-04, govt. exceeded its set target of Rs.14, 500 Crores. 20% of govt. s shareholding in DCIL was sold. A small portion of govt. s share in GAIL and ONGC were also sold. These all resulted in bringing total receipts for 2003-04 to Rs. 15,547.41 crores. No target was set for the years 2005 to 2010. Till date total Rs. 99,738.92 Crores have been received through disinvestment. 45 40 35 30 Disinvestment Target Versus Actually Achieved *Source: divest.nic.in 25 20 15 10 5 0 Target Set Actual Receipts 7
DISINVESTMENT IN ENERGY SECTOR AN ANALYSIS Disinvestment in energy sector started in 1998-99. Government sold a small portion of its shareholding in one CPSE to another CPSE. Through this mechanism, ONGC and IOC each purchased 4.85% shares of GAIL s equity shareholding. IOCL purchased 10% of the shareholding of ONGC, whereas ONGC purchased 10% of equity shareholding of IOCL. 3.06 Crore shares of GAIL were sold to institutional investors in the domestic market. During 1999-2000, 13.50 crore shares of GAIL were sold in the GDR market. In Dec 2003, small portions of Government s stake in GAIL and ONGC were sold. In 2004-05, 43.29 crore equity shares of Rs.10 each out of the Government s equity in NTPC were sold for Rs.2684.07 crore, along with a fresh issue of equity of a similar quantum by NTPC through an IPO in October, 2004. Total receipts from energy sector disinvestments during 2003 05 were around Rs. 15,441.7 Crores. It was around 84% of the total disinvestment receipts during 2003-05 came from disinvestment in energy sector. REALIZATION FROM OFFER FOR SALE OF SHARES IN CPSEs DURING 2003-05 GAIL IBP ONGC NTPC Floor price per share/ Price Band (Rs.) 185 620 680-750 52-62 % of Government equity prior to the Offer 67.35 26 84.11 100 % of CPSE's equity offered for sale 10 26 10 5.25 Shares offered for sale (crore Nos) 8.457 0.576 14.26 43.2915 Final price per share (in Rs) 195 620 750 62 Total amount realised (Rs crore) 1627.36 350.66 10558.4 2684.07 Cumulative total (Rs crore) Total amount realised in 2003-05 from all disinvestments (Rs crore) 15441.7 (84% of total disinvestments) 18,312.28 * Source: divest.nic.in 8
Recent disinvestments in energy sector (from April 2009 onwards) From April 2009 onwards, govt. has been focusing on disinvestment majorly in energy sector. Following companies from energy sector have been disinvested since April 2009 o NHPC (5% of govt. s equity disinvested) o NTPC (5% of govt. s equity disinvested) o REC (4.35 % of govt. s equity disinvested) o SJVN Ltd. (10.03 % of govt. s equity disinvested) o CIL (10% % of govt. s equity disinvested) o PGCIL ( 9.09 % of govt. s equity disinvested) Out of total disinvestment receipts of Rs. 23552.93 crores in 2009-10, funds totaling Rs. 20825.94 Crores came in from energy sector (REC, NTPC, OIL and NHPC) only. It was around 88.4% of the total funds received in that year. In 2010-11, till now Rs. 22762.96 crores have been collected through disinvestment and out of which funds totaling Rs. 19983.35 crores came from disinvestment in energy sector (PGCIL, CIL and SJVN Ltd.) Recently in Nov 2010, govt. sold its 9.09% stakes in PGCIL for Rs. 3721.17 Crores. The shares were sold at Rs 85 to Rs 90 during the FPO process. It was 14.79 times subscribed. CIL IPO came up in Oct. 2010. Govt. disinvested its 10% shareholding in CIL for Rs. 15,199.44 Crores. The issue was 15.14 times subscribed. ISSUE DETAILS RECENT DISINVESTMENTS IN ENERGY SECTOR (Apr 2009 Onwards) PGCIL CIL SJVN Ltd. REC NTPC OIL NHPC Opening Date 9/11/2010 18/10/2010 3/5/2010 19/02/2010 3/2/2010 7/9/2009 7/8/2009 Closing Date 12/11/2010 21/10/2010 20/05/2010 23/02/2010 5/2/2010 10/9/2009 12/8/2009 Instrument EQUITY EQUITY EQUITY EQUITY EQUITY EQUITY EQUITY Issue Type FPO IPO IPO FPO FPO IPO IPO Final Offer Price (Rs.) 85.5 to 90 232.75 to 245 24.7 to 26 193 to 206 201 to 202 1050 36 %age Govt. Equity Divested 9.09 10 10.03 4.35 5 5 Issue Amount (Rs. crore)3,721.17 15,199.44 1,062.74 3,530.04 8,480.10 2,777.25 6,038.55 Times Subscribed 14.79 15.14 6.24 3.47 1.22 30.64 23.53 * Source: divest.nic.in 9
BENEFITS OF DISINVESTMENT Improves efficiency in PSUs through structural adjustments Reduces or mitigate fiscal deficit Introduces competition and market discipline In present era of globalization, disinvestment could provide stimulus to some robust PE s to grow and become truly global corporations. Disinvested companies would be exposed to market discipline and they would become more efficient and survive or will cease on their own Brings about a measure of economic stabilization - New private investor will put in more money in privatized PSEs and economic activity will increase Depoliticizes essential services Consumers will be benefited as they would have more choices and cheaper and better quality products and services Releases govt. s tangible and intangible, such as large manpower currently locked in managing poor performing PSUs, and their time and energy, and deploys them in high priority social activities ISSUES IN DISINVETMENT PROCESS Loss of public interests - PSUs are resources of the nation. They belong to the people. By selling them to private companies, government is seriously affecting the people's welfare. Fear of foreign control - Selling equities to foreign companies result in serious consequences shifting the nation's wealth, power and control to outsiders. Issues with workers - The jobs of lakhs of workers in the PSUs will fall in danger by privatization. Less number of bidders - Even though government plans to disinvest, there are actually less number of people willing to place their bids. Apart from these, it is the government and not PSUs who receive funds from disinvestment. This raises conflicts between the government and the employment union of the PSU. Impact on employees o Significant increase in work load and stress o Fear regarding job cuts 10
FORTHCOMING DISINVESTMENTS Oil and Natural Gas Corporation Steel Authority of India Hindustan Copper Ltd. POLITICS OF DISINVESMENT Disinvestment has always been a very politically sensitive issue, with different parties taking different views in different positions. Strategy towards disinvestment has also been subject to govt. and their allies. There has never been a clear stance on disinvestment by any govt. The abolishment of the ministry of disinvestment in 2004, after the formation of Congress coalition was mainly due to Left parties. Another example of this is the scrapping of recommendations of the Rangarajan Committee and setting up of a new committee by the United Front Govt. when it came to power. CONCLUSION From April 2009 onwards, govt. is focusing on disinvestment, especially in the energy sector. It was around 88.4% of the total funds received in that year. Disinvestment in India was not an attractive idea till 2009. This is simply because successive governments have treated disinvestment merely as tool to raise resources rather than as one designed to restructure the massive public sector. The arguments in favour of disinvestment, either in terms of resource mobilization or in terms of people-ownership, are devoid of sound economic rationale. Rather, the disinvestment agenda is driven by powerful interests; like the big players in the stock market whose fortunes depend on good news and the private corporate sector, which wants to escape the responsibility of paying taxes for financing the government s welfare programmes. The fact that till now only 8 times out of 20 years budgetary targets were met show the ineffective implementation of this process by the govt. Administrative loopholes have led to many controversies regarding disinvestment leading to many legal hassles and creating a negative image regarding disinvestment. There has never been clear direction on disinvestment as it has been subjected to vagaries of politics of power. 11
References: Books o Disinvestment in India by Sudhir Nair o Business Environment by Sheikh Saleem Newsletter of Industrial Research and Consultancy Centre (IRCC), IITB, on Disinvestment of India s Public Sector Units http://www.myicwai.com/studymaterial/fin/chap-2/2-8.pdf Article by V.Gangadhar and Dr. Yadagiri on Disinvestment in Public Sector Enterprises www.india.gov.in http://www.divest.nic.in/valuation_methodology.asp 12