Understand Disinvestment of PSUs in India: Advantages and Disadvantages

Exchange with secured instruments provided that the disclosures in theletter of offer contains suitable justification for such differential pricingand the pricing is subject to other provisions of this regulation. The offer price for partly paid up shares shall be calculated asthe difference between the offer price and the amount due towards calls-in-arrearsor calls remaining unpaid together with interest, if any, payableon the amount called up but remaining unpaid. The offer under these Regulations shall be deemed to have been madeon the date on which the public announcement has appeared in any of thenewspapers referred to in sub-regulation .

Offer for Sale method allows the sell by the process of bidding, where the shares are allotted to the bidder who places the highest bid. These are some of the common methods which are used by the Government of India for disinvestment in PSUs. DIPAM is primarily concerned three outside candlestick pattern with the management of Central Government equity stake in public sector undertakings and conducting disinvestment activities as per the yearly targets set by the Finance ministry. Recently, government came out with a new strategic disinvestment policy .

Chandra Shekhar Government

The Indian Financial Markets are full of risks and opportunities, all you need is a detailed study, experience and research to differentiate between them. Today, we will take a look at the meaning of disinvestment in PSUs and also find out about the merits and demerits of the same. Here is an overview of Indian Government’s current disinvestment plan. At this point, it is critical to note that disinvestment is often confused with privatisation. However, there lies a distinction between these two, which we will now delve into.

The letter of offer shall be despatched to the shareholders notearlier than 21 days from its submission to the Board under sub-regulation. 53[“Providedfurther that the acquirer shall not sell, dispose of or otherwise encumberany substantial asset of the target company except with the prior approvalof the shareholders. However, the public sector overgrew itself and its shortcomings started manifesting in low capacity utilisation and low efficiency due to over manning, low work ethics, over capitalisation due to substantial time and cost overruns, inability to innovate, take quick and timely decisions, large interference in decision making process etc. Hence, a decision was taken in 1991 to follow the path of Disinvestment. Strategic disinvestment in India has been guided by the basic economic principle that the government should not be in the business to engage itself in manufacturing/producing goods and services in sectors where competitive markets have come of age. Minority disinvestment is, after this disinvestment, the government will retain a majority stake in the company, which is greater than 51%, hence the control lies in the hands of the management example is auctioning to institutions where Andrew yule & co. ltd., CMC Ltd. etc.

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The public announcement of the offer or any other advertisement,circular, brochure, publicity material or letter of offer issued in relationto the acquisition of shares shall not contain any misleading information. The public announcement referred to in Regulation12shall be made by the merchant banker not later than four workingdays after any such change or changes are decided to be made as would resultin the acquisition of control over the target company by the acquirer. Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.

Where the escrow account consists of deposit with a scheduled commercialbank, the acquirer shall, while opening the account, empower the merchantbanker appointed for the offer to instruct the bank to issue a banker’scheque or demand draft for the amount lying to the credit of the escrowaccount, as provided in the Regulations. Where the escrow account consists of bank guarantee, such bank guaranteeshall be in favour of the merchant banker and shall be valid atleast fora period commencing from the date of public announcement until79adaysafter the closure of the offer. Simultaneously with the issue of such public announcement,informing the Board, all the stock exchanges on which the shares of thecompany are listed, and the target company at its registered office. Irrespective of whether or not there is a competitive bid, the acquirerwho has made the public announcement of offer, may make upward revisionsin his offer in respect to the price and the number of shares to be acquired,at anytime upto seven working days prior to the date of the closure ofthe offer. Any person, other than the acquirer who has made the first publicannouncement, who is desirous of making any offer, shall, within 21 daysof the public announcement of the first offer, make a public announcementof his offer for acquisition of the shares of the same target company.

Need for Divestment

In the wake of economic policy known as ‘liberalization, privatization, globalization ‘ in the 1990s, the Indian government then began to divest its stake in the public-sector companies which further helped the centre trim its fiscal deficits. Since the 1990s, all successive governments in India have set a disinvestment target in order to raise funds by selling their stake in PSUs. As it allows an entity to reduce its debt, disinvestment can pave the way for the long-term growth and development of a country. Moreover, it enables the open market to have a larger share of PSU ownership, thereby facilitating the development of a stronger capital market. Beginning in the early 1950s, with basic industries such as steel, the public sector helped lay strong economic foundations with a diversified industrial base. In the first 4 decades of Independence, there was a rapid expansion of the public sector into almost every area of economic activity and in a short time span became a mega-conglomerate of both basic and consumer goods production units and service enterprises.

If the acquirer or any person acting in concert with him, failsto carry out the obligations under the Regulations, the entire or partof the sum in the escrow amount shall be liable to be forfeited and theacquirer or such a person shall also be liable for action in terms of theRegulations and the Act. The Board shall, after consideration of the investigation reportreferred to in Regulation 41, communicate the findings of the investigatingofficer to the acquirer, the seller, the target company, the merchant banker,as the case may be, and give him an opportunity of being heard. The investigating officer, in the course of investigation, shallbe entitled to examine or to record the statements of any director, officeror employee of the acquirer, the seller, the target company, the merchantbanker.

Types of Disinvestment

Every company whose shares are listed on a stock exchange shallmaintain a registerin the specified format to record the information received under sub-regulation of Regulation 6, sub-regulation of Regulation7and sub-regulation of Regulation 8. 21a21aaFor the removal of doubt, it is clarified that nothing contained in sub-regulation shall affect the applicability of the https://1investing.in/ listing requirements. Nothing contained in Chapter III of theRegulations shall apply to the acquisition of Global Depository Receiptsor American Depository Receipts so long as they are not converted intoshares carrying voting rights. 8a” acquisition of shares in terms of guidelines or regulations regardingdelisting of securities specified or framed by the Board.

• The government takes the final decision on whether to raise the divestment target or not.
• Disinvestment in an asset, or division, or stake is typically carried out without the intent of reinvesting capital back into the same entity.
• With pandemic in the picture, Air India has suffered huge operational losses worsening financial health.
• On 10 December 1999, the Department of Disinvestment was set up as a separate department and later renamed as Department of Investment and Public Asset Management.

Notwithstanding anything contained in sub-regulation,where the Board is satisfied that in the interest of the investorsno such notice should be given, it may, by an order in writing direct thatsuch investigation be taken up without such notice. For considering such request the Board may call for such informationfrom the company as also from the lead institution, in relation to themanner of vetting the offers, evaluation of such offers and similar othermatters. Every offer which has been made in pursuance ofRegulation30shall be accompanied with an application to the Board for exemptingsuch acquisitions from the provisions of Chapter IIIofthese Regulations. Frequently traded during the 26 weeks precedingthe date of public announcement. The Board shall in case of non-fulfillment of obligations underthe Regulations by the acquirer forfeit the escrow account either in fullor in part.

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Where the offer is subject to a minimum level of acceptance, the acquirermay, subject to the other provisions of this regulation, indicate a lowerprice for the minimum acceptance upto twenty per cent., should the ofernot receive full acceptance. In case of shares which have been listed within six months precedingthe public announcement, the trading turnover may be annualised with referenceto the actual number of days for which the shares have been listed. Provided that where the future plans are set out , the public announcementshall also set out how the acquirers propose to implement such future plans. Banks with financial advisers,stock brokers of the acquirer, or any company which is a holding company,subsidiary or relative of the acquirer. “No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor’s account.”

Other parameters includingreturn on networth, book value of the shares of the target company, earningper share, price earning multiple vis-a-vis the industry average. Upon the public announcement of a competitivebid or bids, the acquirer who had made the public announcement ofthe earlier offer, shall have the option to76. Upon fulfillment of all obligations by the acquirers under the Regulations,the merchant banker shall cause the bank with whom the escrow amount hasbeen deposited to release the balance amount to the acquirers. The board of directors of the target company shall facilitate theacquirer in verification of securities tendered for acceptances. The letter of offer shall state clearly the option available tothe acquirer under sub-regulation .

Example 18 hotel properties of itdc and 3 hotel properties of hci. They are opening up markets for private firms, which will then lead to the formation of better capital markets. Disinvestment is defined as the action of an organization usually central and state selling or liquidating an asset or subsidiary.

• The interim budget of 1991 was the first to mention the sale of assets of Public Sector Enterprises.
• There is a separate department under the Ministry of Finance which handles all disinvestment-related works for the government.
• Provided further that if the acquirer has acquiredshares or voting rights through such market purchases or preferential allotmentbeyond fifty five per cent.

Any person, who holds more than five percent shares or votingrights in any company, shall within two months of notification of theseRegulations disclose his aggregate shareholding in that company, to thecompany. To allay concerns of cronyism, the strategic sale process needs to be fair and transparent with a minimum reserve price that does justice to the valuable assets being auctioned off. A third-party valuation of every PSU’s assets and a minimum number of bidders, should be necessary pre-conditions to going ahead with each sale. Strategic disinvestment is the transfer of the ownership and control of a public sector entity to some other entity . It is important to realize that ownership is not a substitute for regulation. Therefore, instead of creating PSUs in non-priority sectors, the government should look into strengthening the regulatory framework that ensures efficient market conditions.

• Therefore, it is essential for PSUs that divestment is not limited to raising revenues.
• The Government also announced several buybacks and employee OFS over the period.
• Any payment made to the persons other than the target company inrespect of non compete agreement in excess of twenty five per cent.
• Disclosure to the effect that firm arrangementfor financial resources required to implement the offer is already in place,including details regarding the sources of the funds whether domestic i.efrom banks, financial institutions, or otherwise or foreign i.e., fromNon-Resident Indians or otherwise.
• Of the voting rights in the company, he shallforthwith disinvest the shares acquired in excess of fifty five per cent.and shall be liable for action under these Regulations and the Act.