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Case Study Privatisation Of Vsnl India

The Air India saga goes on endlessly. There is no possibility of the airline's continued survival except on the basis of open-ended and unlimited budgetary allocations. Its accumulated losses (before tax) for the three years, 2007-08 to 2009-10, are more than Rs. 15,000 crore. Its net worth, despite repeated capital infusion by the government was negative to the tune of Rs. 4,481 crore in 2009-10, and it employs 256 personnel per aircraft against the industry average of 156!

The various turnaround plans prepared by outside agencies and experts are virtual non-starters as their implementation requires a modicum of normal corporate behaviour that is apparently not possible in a politically vitiated and demoralised environment. The Maharaja is not just sick; it seems to have entered a stage of terminal decline.


It will be unfair for the government to now ask public sector banks, led by the SBI, to mobilise funds for equity participation in the company. Unlike Kingfisher Airlines, where such an approach has been adopted, there is no viable plan or strategy in place or even in sight to bring Air India back to profitability. Not only is Air India's net worth negative, it has huge outstanding payables to other public sector entities like the oil companies and the Airports Authority of India. There is a danger that this one haemorrhaging company could pull others down with it as well.

Air India has been financially bankrupt for several years. As a private company it would been closed long ago. Its continued operation with access to virtually unlimited amounts of public resources is a source of major distortions in the industry and can effectively prevent any Indian airlines company from becoming globally competitive.

Not only does the continued subsidisation of Air India preclude a rationalisation of capacities and market shares which would allow other competitors to take advantage of economies of scale and scope, it also creates substantial moral hazard problems.

Other airlines are unable to rationalise their workforce, and make do with less than globally acceptable levels of efficiency, safety and customer care requirements. With airline traffic growing at an amazing 20 per cent or more annually, Indian airlines have the opportunity to challenge globally established majors in the airline industry.

However, this opportunity will be squandered if government policy remains exclusively focused on saving and resuscitating Air India rather than be concerned with the global competitiveness of Indian airlines industry as a whole.


The way forward is amply clear and been suggested on numerous occasions by political leaders, industry experts and sundry observers. But this requires the utterance of the currently dreaded and politically incorrect 'P word'.

Privatisation of inefficient and haemorrhaging public sector enterprises has been banished from the Indian policy lexicon for some years. Disinvestment is the most that we can talk about, and that too in undertones for fear of being seen as politically incorrect.

But as Air India's case demonstrates in ample measure, one cannot substitute for the other. The only possible way forward in the case of Air India is to sell the company, privatise it, to any willing buyer, which may itself be difficult to locate.

Privatising Air India or selling it to a strategic investor should not be politically or ideologically unacceptable. The airline does not provide a public service to the under-privileged. It does not cater to some strategic needs, except for ferrying stranded Indians, which could be achieved by chartering private flights.

Air India's employees certainly do not represent the 'have-nots'. Its management has not covered itself in glory either. It serves no strategic or security objective. So on what grounds has privatisation being ruled out ab-initio as an option? To my mind there are none. Instead, the corporation is a prime candidate for privatisation, and has been so for decades. It is time that the Exchequer and the Indian taxpayer are rid of this unnecessary burden. There are clearly no short-cuts.

The alternative of handing over the management to a private company while retaining government ownership is not feasible at this stage, as employees will continue to act as government servants with minimal accountability and potential investors will remain wary of government intervention.

Air India can either be closed down or privatised to save the country further financial waste and avoidable future embarrassments.


There can only be two possible reasons for not privatising the airline. One, that it is our national carrier carrying the Indian flag. Private airlines can carry the same flag with the same degree of pride if not more. Are we any less proud of Tatas, L&T and Mittals having acquired international status than we are of BHEL, EIL and NTPC emerging as globally competitive players? Two, that it serves vital national interests by flying to destinations which will not be served by private airlines.

This can be easily and far more economically addressed by earmarking a pool of public funds to be paid to those airlines which fly to commercially non-viable destinations. This will also eliminate major distortions that are generated in the industry when a dominant player is allowed to operate without a hard budget constraint.

This is anathema to competition. The Competition Commission of India should take up this case up on a suo moto basis and help the government out of its present predicament.

(The author is Secretary-General, Ficci. >blfeedback@thehindu.co.in)

Published on

Note: 33.58% equity of IBP was sold to IOC. After the strategic sale, IOC held 53.58% of the equity of IBP. Hence, IBP continued to be a Central Public Sector Enterprise (CPSE)

List of Privatised Hotels:

* Hotel Units of Hotel Corporation of India

**Hotel Units of India Tourism Development Corp. Ltd.

***Hotel Ashok Bangalore(given on 30 year lease)

Bharat Aluminium Company Ltd. (BALCO)

BALCO is a fully integrated Aluminium-producing company, having its own captive mines, an alumina refinery, an Aluminium smelter, a captive power plant, and down-stream fabrication facilities. It was set up in 1965 and has its corporate office in New Delhi . Its main plant and facilities are situated in Korba, Chhatisgarh. It also has a fabrication unit in Bidhanbagh ( West Bengal ). The refining capacity of BALCO is 2 lakh tonnes per year and its smelting capacity is 1 lakh tonnes per year. Its employee strength was 6,436 on 2nd March 2001. 

The Government of India had 100% stake in BALCO prior to disinvestment. In 1997, the Disinvestment Commission classified BALCO as non-core for the purpose of disinvestment and recommended immediate disinvestment of 40% of the Government stake to a strategic partner, and a further reduction of the Government stake to 26% within 2 years of the strategic sale through a domestic public offering. It further recommended disinvestment of the entire remaining stake at an appropriate time thereafter. The Cabinet accepted the recommendations of the Disinvestment Commission for disinvestment of 40% stake through a strategic sale and further disinvestment through the capital market. 

Later, in 1998, the Disinvestment Commission revised its recommendation and advised the Government to consider 51% disinvestment in favour of a strategic buyer along with transfer of management, which was accepted by the Cabinet. The Government thereupon appointed M/s Jardine Fleming as advisor to assist in the sale of its 51% stake in BALCO to a strategic buyer. 

Simultaneously, it was brought to the attention of the Government that BALCO had a bloated equity of Rs. 489 crore and large unutilised free reserves of the level of Rs. 424 crore. It was suggested by the Ministry of Mines that BALCO's equity be reduced by 50% prior to disinvestment, by using its substantial cash surplus. This proposal was accepted. As a result, the Government received Rs. 244 crore from the capital restructuring of BALCO, and another Rs. 31 crore as tax on this amount, prior to disinvestment. 

The strategic sale process for BALCO started in late 1997, after the first decision of the Government, and finally came to end on 2nd March 2001. The 51% stake was sold to Sterlite Industries, the highest bidder, and fetched the Government Rs. 551.50 crore. The price received was higher than the values indicated by the various methods of valuation used. The Government thus recovered Rs 827.50 crore from this privatisation against approximately Rs. 10 crore as dividend it used to get against the 51% shares during the peak Aluminium cycle. 

Post sale, a number of doubts had been raised by various quarters on the disinvestment of BALCO, especially with regard to transparency, valuation and protection of employees’ interests. However, the entire sale process, including the appointment of advisor and the approval of the price bid, was carried out in an extremely transparent manner, in keeping with the highest standards of global practices. Of special mention are the clauses in the Shareholders’ Agreement with the strategic buyer, which offer adequate protection to employees of all levels with regard to their job safety and severance packages. 
Post-Privatisation Status of BALCO

  1. The new management introduced VRS from 31st July 2001 to 16th August 2001. 981 applications (from 151 executives and 830 workers) were received. 694 old VRS applications were also pending. A total of 956 applications were accepted mostly where units were lying closed.  
  2.  In spite of incurring losses to the tune of Rs. 200 crore due to the strike by the employees in 2001, an ex gratia payment of Rs. 5000 was made to all the employees.  
  3. Long-term wage agreement for a period of 5 years was entered on 7th October 2001 (wage revision was due since 1stApril 1999 and the earlier revision was for 10 years) as follows:  
  • Workmen get a guaranteed benefit at the rate of 20% of the basic pay  
  • Increase in allowances:  
    • Night shift allowance: Rs.10 - Rs.20/shift  
    • Canteen allowance: Rs. 400/month (instead of subsidised canteen facilities)  
    • Education allowance: Rs. 50 - Rs. 75/month  
    • Hostel allowance: Rs.150 - Rs.200 per month  
    • Scholarship amount to meritorious children doubled  
    • Leave Travel Assistance of around Rs. 6000 as cash every year  
    • Conveyance allowance: Scooter users Rs. 400 - Rs. 500/month, Moped users: Rs. 240 - Rs. 350/month, Other users - Rs. 150 - Rs. 260/month  
  1. New practices introduced:  
  • Job rotation  
  • Appraisal system 
  1. The new management proposed an investment of Rs. 6,000 crore which would increase production 4 times.  

Landmark Judgement in BALCO Disinvestment
In protest of the BALCO disinvestment, the workers went on a 67-day strike. Three writ petitions-two in Delhi High Court and one in Chhatisgarh High Court- were filed against disinvestment in BALCO in February 2001. The Supreme Court in its unanimous judgement delivered on 10th December 2001 validated disinvestment of BALCO by the Government of India. The landmark judgement also defined, amongst others, the parameters of judicial review in the Government’s economic policy matters. The Hon’ble Supreme Court, while validating BALCO-disinvestment, and dismissing the petitions, remarked, “Thus, apart from the fact that the policy of disinvestment cannot be questioned as such, the facts herein show that fair, just and equitable procedure has been followed in carrying out this disinvestment.” This judgement facilitated the path for other successful privatisations.

CMC Ltd.
The Company

CMC Ltd. is mainly involved in hardware maintenance, systems engineering, system design, development, consultancy and networking. It has a wholly-owned subsidiary, Baton Rouge International Inc., USA
Pre-Privatisation Status of CMC Ltd.

Financial Highlights:                                                              All figures in Rs. Crore

*If GOI earns 10% on the sale price of Rs.152 crore, it would get an interest of Rs.15.2 crore annually, as against an average dividend of Rs. 1.42 crore over the previous four years. 

The Disinvestment Process
Government Approvals

  • In August 1990, the Government approved to increase CMC’s authorized capital to Rs.35 crore and that additional equity capital be raised in the market. The Government also decided that its holding in CMC should not be less than 60%
  • In 1992, the Government disinvested 16.69% equity
  • In April 1999, CMC was referred to the Disinvestment Commission, but it was withdrawn as Government decided raising of additional equity via private placement or by directly going for public issue
  • CMC could not raise the funds till November 2000 by way of either private placement of shares or through public issue
  • On 1st February 2001, the Government decided to bring down its equity to 26% by way of induction of a strategic partner and also by way of other means

Expressions of Interest

  • Expressions of Interest were invited in the month of February–March 2001 and 14 parties (domestic and international) expressed interest in acquiring stake in CMC Ltd.
  • The 3 non-serious parties dropped out without visiting the Data Room.
  • 6 parties dropped out before the second round of Data Room study.
  • One more party exited after completing the second round of due diligence.
  • 4 parties were left in the field who appeared to be serious bidders.
  • Ultimately, two parties sent in their technical and financial bids. However, one bid was found non-compliant as the required bank guarantee was not furnished. 

Evaluation of the Bid and the Price OfferedValuation of CMC Ltd. The valuation of the 100% equity shares of CMC Ltd. by different methods is as under:

  • The Evaluation Committee decided the floor price/reserve price of Rs.108.88 crore for 51% equity of CMC based on the DCF Method
  • Tata Sons Limited have acquired 51% stake in CMC Ltd. for Rs.152 crore
  • The per share price works out to about Rs.197

Employees Stock Option Scheme for CMC

  • The Government have approved allotment of 6.31% equity shares of CMC Ltd. to employees under the Employees Stock Option Scheme.
  • Existing regular employees on the rolls of the company, including the subsidiary { Baton Rouge International Inc., USA ( BRI , USA )} as on 1stSeptember 2001 would be eligible to participate.
  • The shares would be offered in a graded manner to the employees.
  • The shares allotted under the would be locked in for a period of one year from the date of allotment.
  • Shares would be offered at one-third of the “listed market value” (average of the closing price on BSE/NSE for the last 30 days prior to the formal offer date) or one-third of the strategic sale price per share, whichever is lower. 

    The Price Earning ratios (PE ratio) of some of the companies in the BSE IT Index for the last three years: 

Post-Privatisation Status of CMC
As per the requirements under the SEBI Takeover Code, the strategic partner had announced an open offer for acquiring shares from the market. The opening date was 27th November 2001 and the closing date was 26thDecember 2001. In response to this open offer, 96 applications were received for 18,561 shares, i.e., 0.12% of CMC’s paid-up capital. 

Post sale, the new management distributed 50% of Productivity Linked Incentive for the FY 2000-2001 to all eligible staff members amounting to about 4-6 months’ basic pay in the pre-revised grade. Provision for Productivity Linked Incentive for the FY 2001-2002 was also made in the Q2 financial results. Fresh recruitment of 558 personnel had also taken place in the one year after privatisation. 

Since disinvestment, CMC and the strategic partner are offering their complementary products and services to many of their customers, both in domestic and international markets. The share prices are also soaring showing positive market sentiment.

Hindustan Zinc Ltd. (HZL)

Press Note on Hindustan Zinc Ltd. (HZL)
Government of India has decided to disinvest 26% equity in Hindustan Zinc Limited in favour of Sterlite Opportunities and Ventures Limited (a Special Purpose Vehicle promoted by Sterlite Industries (India) Limited and Sterlite Optical Technologies Limited), at a price of Rs. 445 crore (amounting to Rs. 40.50/share). 

This means a P/E (price/earning) ratio of about 21. The average dividend paid by the company, calculated for 26% equity, over the last eight years till 2000, has been of the order of Rs. 3.50 crore per year. Details of P/E ratios for strategic sale of other companies are given in the Annexure. 

BNP Paribas served as the Advisor and M/s Amarchand Mangaldas & A Shroff and Company served as the Legal Advisor to the transaction. 

HZL was incorporated in January 1966 as a Public Sector Company after the takeover of the erstwhile Metal Corporation of India Limited. Its paid-up capital is Rs. 422.53 crore, out of which Government of India holds 75.92% while Financial Institutions, other Corporate Bodies (including NRIs) and Indian nationals hold the balance equity. It is a profit-making and listed company, and its shares are traded at the Stock Exchanges of Mumbai, Delhi and Jaipur. There has been a spurt in its share prices, especially after the successful disinvestment of VSNL, IBP, etc. The weighted average price of shares over the last six months is about Rs.25.30 and the average weekly high and low of closing price for last six months is over Rs.22 per share. 

The decision to disinvest 26% equity through strategic sale was taken on 29.8.2000.  Following due process, price bids were invited from all the Qualified Interested Parties, to be received on 8.11.2001. Only one QIP submitted the price bid which was rejected since it was lower than the reserve price fixed.

In pursuance of Government directions, a renewed exercise was undertaken involving the original QIPs who had completed their due diligence as well as the Advisors/Legal Advisors to ensure how the value depleters in the transaction

documents and bidding conditions be modified to enhance the potential value of the company in order to make it more attractive to the bidders. M/s URS Corporation was appointed to conduct environmental, health and safety due diligence review of the company. Amongst the modifications made in the transaction documents are the sequencing of call and put options and their pricing, the provision to have the Chairman nominated by the Strategic Partner once it acquires 51% stake, unlimited environmental indemnity for a period of three years and a clear road map for the Government to exit from the company. Besides, sale price has been de-linked from Public offer price under the SEBI Takeover Code. Meanwhile, on 28.2.2002 it was announced that the customs duty will be reduced from 35% to 25%, which is likely to impact on the profitability of the company.

Finally, price bids were invited from all the five Qualified Interested Parties (Glencore International, Binani Industries, Indo-Gulf Corporation, Sterlite and Metdist). 

Two financial bids were received from M/s Indo Gulf Corporation and M/s Sterlite Opportunities and Ventures Limited. The reserve price fixed was Rs.32.15 per share (Rs.353.17 crore for 26% stake). Both the price bids received were a
The higher bid, that of M/s Sterlite Opportunities and Ventures Limited, for Rs.445 crore (translating to about Rs.40.50 per share) was accepted. The price offered by M/s Sterlite Opportunities & Ventures Limited is substantially higher than the offer made by Sterlite Industries in November, 2001. 

The transaction was closed on 11.04.2002. An attractive ESOP scheme was offered to the employees and full-time functional directors of the Company. 1.46% shares were sold to employees @ Rs. 10/- per share in Dec. 2002.

As part of thr "Call Option' available to the Strategic Partner, Government parted with another 18-92% for Rs. 323.88 crore @ Rs. 40.50 per share in November, 2003. 
P.E. Ratios
Stakeholder: Taxpayer
Saleof Shares Vs. Strategic Disinvestment

* As earning per share was negative
** Inclusive of income from dividend, etc. (after the end of Monopoly)

HTL Ltd.Background of HTL Ltd.

  • The company was wholly owned by the Government of India, and was incorporated in 1960 primarily for manufacture of electromechanical teleprinters, to cater to needs of erstwhile Post and Telegraph Department.
  • From the early 1990s, HTL diversified its product portfolio from manufacture of electromechanical teleprinters to digital telephone exchange products, transmission products, access products and data and terminal products.
  • Main manufacturing facility is located at Guindy Industrial Estate, Chennai and a supplementary facility is located at the Hosur Industrial Estate nearBangalore city
  • Operates through a sales and distribution network of 6 regional offices and sub- offices
  • HTL employs approximately 1100 people

Historical Financial Performance

All figures are in Rs. million

Constraints in the business of HTL
Despite being one of the largest revenue earners amongst the telecom equipment companies in India , HTL’s profit margins had been low. HTL’s main product line, digital telephone products (manufactured with technology support from C-DoT and Siemens) contributed to the top line substantially. These products commanded a lower margin than the other categories like transmission and access products. 

The FY 2001 had witnessed severe price competition among both Indian and multinational telecom equipment companies in the switching equipment segment, compounded by the DoT’s criteria for procuring orders at the lowest price bid. 

Some of the key constraints to the company’s operations included:

  • Product mix skewed towards digital switching equipment
  • Large workforce
  • Low spending on technology research and development
  • Long working capital cycle:
  • Inadequate marketing and distribution network
  • Negligible export market

Comparative performance
The following table sets out the key financial performance of some of the publicly traded telecom equipment manufacturers in India .

The Disinvestment Process
Recommendations of the Disinvestment Commission
The Disinvestment Commission in its 2nd Report of April 1997 had classified HTL in the non-core category and interalia recommended for strategic sale of either 100% or 50% of shares of HTL through competitive bidding. Decision of the Government The Cabinet on 16th December 1998 decided to disinvest 50% of the equity in HTL to a strategic partner. Subsequently, on 26th May 2000, the Government decided to disinvest 74% of the equity in HTL as there was lukewarm response from bidders for the earlier proposed 50% disinvestment.
Experts appointed by the GoI

    • Global Advisor: KPMG India Pvt. Ltd.
    • Legal Advisors: Amarchand & Mangaldas & Suresh AShroff & Co.
    • Asset Valuer: M/s P.T. Shanamugam

    Competitive Bidding Process

    • The GoI selected the Global Advisor for the disinvestment process on 13th September 1999. An Inter Ministerial Group (“IMG”) meeting was constituted
    • As explained above, GoI initially planned to disinvest 51% of its share holding to a long-term strategic investor
    • However, this mandate was then changed to a sale of 74% disinvestment of as the GoI found it to be more investor friendly
    • The Global Advisor received the Expressions of Interest (EoIs) from the interested parties, which included Motorola India Limited, Wipro Peripherals Limited along with Huawei Technologies of China, Tamil Nadu News Prints and Papers Limited (TNPL), Alcatel Trade International AG, Himachal Futuristic Communications Limited (HFCL) and Gokina Infotech (Pvt.) Ltd. TNPL later tied up with United Telecom
    • Of the above, Motorola and Alcatel dropped out due to their perception of the telecom equipment market. Wipro, HFCL and TNPL and United Telecom consortium were invited to visit the data room in Chennai
    • Wipro dropped out after the data room citing lack of R&D facilities in HTL as their criteria for dropping out
    • Draft shareholders agreement and share purchase agreements were issued to TNPL & UTL and HFCL, and binding bids were invited
    • The GoI received bids from these prospective candidates on September 27, 2001


    • KPMG presented the valuation report to the GoI on September 27, 2001.
    • Based on the various pricing methodologies, the indicative pricing range for 100% equity stake in HTL is summarised below:
    • It was considered that the value as per the DCF Methodology would be the most appropriate indicator of the value that a potential strategic acquirer may be willing to pay, given that the transaction is being pursued as a strategic sale.
    • The Evaluation Committee therefore recommended that the reserve price should be Rs. 388.02 million for 74% equity value of HTL.


    • Himachal Futuristic Communications, a leading Indian telecom equipment manufacturer won the transaction at Rs 550 million for 74% of the equity. This corresponds to Rs. 743 million for 100% of the equity.
    • The Price to earnings ratio works out to 37, as against PE ratios of Punjab Communications of about 10 and of Shyam Telecom of 5.6.
    • Given the stiff competition in the sector and the declining profits of HTL, induction of a strategic partner at this stage should help the company to grow.
    • If this amount of Rs. 550 million were invested in a fixed deposit by the Government, it would get an annual return of Rs 55 million (assuming an interest rate of 10% per annum)
    • Against this return, the annual dividend that the Government has been receiving against 74% equity is as follows:

    Source :HTL Annual ReportsLabour protection measures

    • Regarding employee protection adequate provisions have been made in the Shareholders agreement that both parties envision that all employees of the Company on the date hereof will continue in the employment of the Company and recognises principles for the benefit of the members of the Scheduled Caste/Scheduled Tribes, physically handicapped persons and other socially disadvantaged categories of the society
    • Shareholders agreement provides that strategic partner shall not retrench any Employees of the Company for a period of one (1) year other than any dismissal or termination of employees of the Company from their employment in accordance with the applicable staff regulations and standing orders of the Company or applicable Law; any restructuring of the labor force of the Company shall be implemented in the manner recommended by the Board and in accordance with all applicable laws; and in the event of any reduction of the strength of the Company’s employees the SP shall ensure that the Company offers its employees, an option to voluntarily retire on terms that are not, in any manner, less favorable than the voluntary retirement scheme applicable to the Company at the time of Closing
    • In the handing over ceremony held at the Sanchar Bhawan, New Delhi on 16 October 2001, the new management of HTL announced that there were no plans to retrench the workforce.
    • In fact, the new management took this opportunity to announce the grant of two increments, that were earlier assured prior to disinvestment to all employees of HTL, but had not yet been implemented.

    Indian Petrochemicals Corporation Ltd. (IPCL)

    Disinvestment in IPCL

  1. Government of India (GOI) on 17th May 2002 approved induction of Reliance Petroinvestments Ltd. (Reliance Group) as strategic partner in IPCL, a leading petrochemical PSU, through sale of 26% equity shares at a consideration of Rs. 1,491 crore.

Reserve Price

  1. The Advisor (UBS Warburg) had in their report computed the valuation of shares in IPCL by adopting four methods, namely, Discounted Cash Flow, Adjusted Balance Sheet, Comparable Companies and Adjusted Asset Valuation. The Evaluation Committee considered the valuation of IPCL done by the Advisor and recommended a reserve price.

Reserve Price

The reserve price recommended by the Evaluation Committee was based on the Discounted Cash Flow methodology, as it is the most appropriate valuation methodology for a going concern.
Bids received

  1. The bids submitted by the three bidders is summarized below:
  1. The highest bid of Reliance Petroinvestments Ltd. for a price of Rs. 1,491 crore translates into a P/E of 58 based on EPS of Rs. 4 for the year 2001-02, which is much higher than the  P/E multiple of peer group companies, such as Reliance Industries Ltd. (10.5) and GAIL (5.36).
  2. The figures of Profit after Tax (PAT), rate of Dividend declared and share of GOI on 26% equity for last five years are as under:

Taking into account an accrual of 10% on the sale proceeds realized from transfer of 26% Government equity stake to the Strategic Partner, an amount of Rs.149 crore would accrue per year as compared to an average of Rs. 18 crore per year approx. received by Government of India as dividend from IPCL.

  1. IPCL, one of the India’s leading petrochemical products company, has been classified as operating in ‘non-core’ sector. The total paid up equity of the company is Rs. 248.22 crore, out of which Government holds shares of Rs. 148.80 crore. The equity sold to the strategic partner would be of face value Rs. 64.54 crore (26.6%). The Government on 16th December 1998 had decided ‘in principle’ to the disinvestment in IPCL through strategic sale.  The Government had invited Expressions of Interest from interested investors through a Press advertisement.
  2. Meanwhile, in November 2000, in view of synergy of operations and interests of IOC and IPCL, the Government also explored the possibility of the Vadodara Complex of IPCL being transferred to IOC and then disinvestment of 25% equity processed in respect of rest of the IPCL. Finally, Government decided on 12th November 2001 to no longer pursue this route and decided instead on continuing the effort for strategic sale for IPCL as a whole. It was decided that the equity offered for strategic sale should be raised to 26% instead of 25% proposed earlier with the commitment of disinvesting at least a further 25% equity
  3. Government was assisted by M/s. UBS Warburg as Advisor for the transaction.  The legal advisors were Pathak & Associates and the Asset Valuers were M/s. Deloitte, Haskins & Sells.
  4. Interested investors submitted Expression of Interest (EOI) in December 2001.  The shortlisted parties completed the due diligence exercise and the transaction documents were agreed upon, after a number of rounds of discussions with bidders.  Thereafter, based on these documents, financial bids were received from the bidders on 29th April 2002. 

Last updated on 21stAugust 2002

Jessop & Co. Ltd. (JCL) Jessop & Co. Ltd. (JCL) was nationalized in 1973 as it was  incurring losses. Subsequent to nationalization also, the company continued to incur losses except in a few years it earned profit. The performance of the company in the last few years are given below:

*Includes adjustment relating to waiver of interest
The accumulated losses and the Net Worth of the company (in Rs. crore) as on 31st March 2001 and 30th September 2001 are:

The Government has made several attempts in the past since 1986 to revive the company through restructuring. The details of reliefs and concessions given by the Government in the past are:

(All figures in Rs.crore)

In spite of the huge infusion of funds and financial restructuring, the company could not be revived.
Since JCL is a sick company under the purview of BIFR, BIFR also made attempts to revive the company, but ultimately in August 2000, it declared the revival scheme as having failed and asked the Operating Agency to explore the possibility of changing the management.
The Operating Agency issued an advertisement in September 2000. That did not yield any proposal for reviving the company.
Therefore, as a final attempt to revive the company, the Government started the process of disinvestment in JCL. The Government approved fresh restructuring proposal (both cash and non-cash based) involving approximately Rs. 203.82 crore. But, as per the computation made by the Advisor (M/s A F Ferguson & Co.), the net worth of the company as on 31st March 2002 even after the financial restructuring by the Government would likely to be Rs. (-) 17.87 crore.
The Government received two financial bids for 72% equity stake in JCL. The bid of M/s Ruia Cotex Ltd. amounting to Rs. 18.18 crore was more than the reserve price of Rs.12 crore for 72% equity shares.
The Government on 27th February 2002 decided to accept the financial bid of M/s. Ruia Cotex Ltd. for acquiring 72% stake in the equity of JCL for Rs.18.18 crore. 
Since Jessop & Co. was under the purview of BIFR, BIFR was approached for seeking its approval to the proposal of induction of the strategic partner. In September 2002, BIFR cleared the revival scheme through induction of strategic partner selected by the Government. However, a writ petition was filed by Jessop & Co. Ltd. Staff Association in the Kolkata High Court, the judgement for which had  been reserved by the Court on 15th November 02 was given on 28th March 2003.

The Lagan Jute Machinery Company Limited (LJMC) was the first case of successful privatisation of a Central Public Sector Undertaking, carried out by the Government. LJMC is a Calcutta-based company, and manufactures jute machinery (mainly spinning and drawing frames). It employed around 400 employees prior to privatisation. It started making losses from 1996-97 onwards and the turnover was on a decline. LJMC's net worth as on March 1998 was around Rs. 5 crore and its annual turnover was also around Rs. 5 crore at that time.

LJMC had the potential to increase its turnover and be profitable. It was the main supplier of the type of machines that it manufactured. The company was known for the quality of its products. There was scope for expanding into the spares market and exports. Some (but not substantial) investment was required to modernize and renovate the plant and machinery. The manpower age profile was high but there was not much surplus manpower.
In the initial stages of disinvestment, LJMC was approved for privatisation in the year 1997, through sale of 74% stake to a strategic partner. The disinvestment process was handled by LJMC's holding company, Bharat Bhari Udyog Nigam Ltd. (BBUNL), under the administrative control and directions of the Department of Heavy Industries (DHI), Ministry of Industry, Government of India (Government of India). TheDisinvestment Process Objectivity and transparency were the key requirements in the whole disinvestment process. As it was the first case of disinvestment for the Indian Government, the disinvestment process evolved as the transaction progressed.
After the issue of the advertisement for inviting bids from the potential partners, it took around 10 months to complete the disinvestment process.
The advisors carried out a review of the company and gave advice on the extent, mode and methodology of disinvestment. The issues requiring action by the management/approval of the GOI were identified and steps taken to ensure that the process moved smoothly and shareholder value was maximized.
The Cabinet gave its approval and the necessary agreement was entered into with the strategic partner in December 1999. After full payment against the shares and execution of share transfer agreement, the management of the company was handed over to the strategic partner in July 2000. Post-Privatisation Status of LJMC

  • The strategic partner has retained the same senior management team and there has been no retrenchment of workers. An industry expert has been appointed as the Managing Director of LJMC. The operating and financial performance of the company has improved after the change of management.
  • The post-privatisation performance of LJMC(July-September 2000), as compared to pre-privatisation period (April-June 2000), as reported by the management, is given below:
  • The new management is reported to have taken an initiative to introduce new products and revamp the marketing function (which was weak earlier) and other areas for improving the company's performance
  • LJMC is on the path of revival after privatisation without drastic surgery and without any of the common apprehensions about privatisation having taken place

Maruti Udyog Ltd. (MUL)

  • On 14th May 2002, the Government approved disinvestment in Maruti Udyog Ltd. through a two-stage process:
  • A rights issue of Rs. 400 crore by MUL in the first phase with the Government renouncing its rights shares to Suzuki. Suzuki would gain majority control and pay Rs. 1,000 crore to the Government as control premium.
  • Sale of its existing shares through a public issue in the second phase; the issue to be underwritten by Suzuki.

Highlights of the Agreement reached

  • The highlights of the agreement reached between the Negotiating Teams of the GOI and Suzuki are summarised below:
  • The total value of the rights issue would be Rs. 400 crore
  • The rights issue price would be Rs. 3,280 per share. Thus, the rights issue would be for a total of 12,19,512 shares of Rs. 100 each
  • The fair value for the purpose of working out renunciation premium would be the average of the 3 values indicated above, i.e., Rs. 3,280 per share
  • GOI will renounce the whole of its rights share of 6,06,585 shares and Suzuki will subscribe to the whole of the rights shares so renounced by GOI at the fair market value
  • Suzuki would, through this method and those spelt out below, enhance the value of MUL and Suzuki will pay a control premium of Rs.1,000 crore to GOI, without GOI parting with even a single of its shares in MUL
  • Suzuki and GOI have agreed to enter into a Revised Joint Venture Agreement (JVA). The Revised JVA shall constitute the entire agreement between GOI, Suzuki and MUL with respect to the subject matter of the Revised JVA and any prior understanding and agreements between the Parties with respect to such subject matter shall be superseded
  • Suitable amendments in the Memorandum and Articles of Association of MUL would be carried out to bring them in line with the decisions recorded above and also to enable the listing of MUL shares on the stock exchange
  • The Revised JVA envisages that GOI would sell its existing shares in the domestic market with participation of Indian and Global investors as permitted by law after the completion of the rights issue transaction
  • Suzuki has agreed to underwrite the first public issue of approximately 36 lakh shares held by GOI at a price of Rs. 2,300 per share. For the balance shares, GOI has a ‘put’ option at a discount of 15% and/or 10% of average market price. GOI always has a ‘put’ option up to 30th April 2004 at the book value now (Rs. 2,000) or then, whichever is higher
  • Since the rights issue will be of a size of 12,19,512 shares, the relative shareholding of Suzuki and GOI after completion of the rights issue would be 54.20% and 45.54% respectively.
  • The  price  per share  that  emerges  now  is  Rs. 3,684, which should be compared to the value per share that would be arrived at if the formula agreed to between Suzuki and GOI in the 1992  agreement  were  to be used. Using that formula the price per share works out to Rs. 1,153 based on the provisional figures for the latest year i.e., 2001-02.

Achieved in Constraints

  • Because of the earlier agreement, GOI’s negotiating position has all along been highly disadvantageous because of the following constraints:
  • The clause in the existing agreement that SUZUKI’s consent is required for GOI to transfer its share
  • In the earlier transactions with SUZUKI in 1982 and 1992, when Suzuki’s shareholding was allowed  to  be  increased (vis-a-vis GOI), first from 26% to 40% and then from 40% to 50%, no  control premium had been paid by Suzuki, though control had passed to them. As a matter of  fact, the Government  received  no  payment  at  this stage  as  shareholding  was  allowed  to be increased by issuance of new shares to MUL. Exit options were also not built in
  • The pricing formula in 1992  also  yielded a  low price per share of Rs. 269 at which the transaction was done
  • Using the same formula of 1992 now, the price per share would be Rs.1,153 as stated above. As against this, the current transaction would be at a minimum of Rs. 3,684 assuming undertaking at Rs. 2,300
  • If  we  examine the rights  issue  alone, the  new  shares are being allotted to Suzuki at Rs. 3,280  against  Rs. 269 in  the  last  transaction(equivalent value Rs.1153). Also, against ‘nil’ control premium last time, the GOI is being paid Rs. 1,000 crore as control premium
  • Suzuki already has 50% control in the company and GOI in a minority position at 49.74%
  • An atmosphere of distrust between the two sides, due to the previous arbitration case being contested by both sides during 1997
  • Suzuki’s initial offer was of Rs. 170 crore as control premium, which was increased to Rs. 286 crore after considerable negotiations. Thereafter, it took the negotiating team over a month to negotiate a sum of Rs. 1,000 crore presently offered by Suzuki.
  • Similarly, initially Suzuki was totally reluctant to incorporate any underwriting of the public issue by GOI shares. SUZUKI has now agreed to underwrite the public issue of the 36,12,169 existing shares at Rs. 2,300 per share and the balance 29,68,012 at a minimum of the present  book  value of about Rs. 2,000 per share. Once MUL is listed, and when GOI goes for a public issue with full backing of Suzuki, the share prices are likely to be above the book value. This would mean higher receipts to GOI.

Analysis of the Deal

  • The MUL disinvestment is unique in nature as compared to the other strategic sale transactions completed so far such as VSNL, BALCO, HZL, CMC, etc. Therefore, this transaction would have to be judged using different methods as discussed below. 
  • Comparison with other disinvestment cases: Since MUL is not a listed company, both sides had agreed to determine the fair value of MUL shares through valuation by three independent valuers. This average value worked out to Rs. 3,280 per share. Therefore, the value of Government’s existing 65,80,181 shares works out to approximately Rs. 2,158 crore based on this fair value. What Government is receiving from Suzuki now is Rs. 1,000 crore as control premium and considering the undertaking at Rs. 2,300 per share for the 36 lakh shares and Rs. 2,000 per share for the balance approximately 29 lakh shares, it would be an additional amount of Rs. 1,424 crore for the existing shares. If the existing shares could be sold at more than the present book value, GOI’s receipt would further go up. Thus, the GOI will, at a minimum, get out of the transaction of handing over the control and selling its existing shares forRs. 2,424 crore, which is Rs. 266 crore above the fair value of Rs. 2,158 crore mentioned above. If we compare this with similar figures of earlier transactions it would be seen that the present transaction is even better than what has been possible in them. 
  • Suzuki already has 50% shares in MUL and control and management rights which were more than equal as per earlier agreements. This was due to their being technology suppliers. In other cases of disinvestment, the strategic partner does not have any control before acquiring GOI shares but acquires control only after the strategic sale. Thus, the control premium presently offered by Suzuki should be viewed in this background. 
  • Annual Cash Inflows to the Government: Currently, GOI receives dividend on its shareholding. The dividend received by GOI in the past several years has been about Rs.13-20 crore per annum. In the year 2000-01, MUL did not declare any dividend. In case this transaction is completed, GOI would receive Rs.1,000 crore upfront which would yield interest of Rs. 100 crore per annum at the conservative rate of 10%. Added to this would be the dividend on the existing shares, even if Government does not sell these shares. If it sells the shares then GOI would receive a minimum of Rs. 142 crore per annum (at the rate of 10%) on the balance receipt of Rs. 1,424 crore as indicated above. Thus, the minimum annual yield to GOI would be Rs. 242 crore against the present dividend level of Rs. 13-20 crore per annum. 
  • Value enhancement by Suzuki: The Revised JVA incorporates commitment by Suzuki that:
  • Suzuki will endeavour to make MUL the source for some of its models globally.
  • Suzuki will assist MUL to access new export markets.
  • Suzuki will give discount on certain components as previously agreed to by it.
  • Suzuki will set up a task force to explore the possibilities of further reduction incosts at MUL.
  • Suzuki will promote MUL and its products in the global market.
  • Suzuki will aggressively strengthen MUL’s manufacturing and technical capabilities so as to make MUL’s products internationally competitive in terms of quality and cost.

In case the withdrawal of GOI results in Suzuki undertaking the above activities, the beneficiary would not only be Suzuki but also the Indian automobile sector. MUL today contributes nearly Rs. 2,500 crore to the national exchequer annually. Also, higher growth and earnings of MUL would result in higher receipts to GOI through taxes from MUL. Further, all the above measures by Suzuki would enhance the value of MUL and hence ensure the possibility of much higher receipts than the minimum estimated above.

  • Price Multiple Ratio Analysis: One other way to look at the transaction would be to test the P/E in this case with the P/E of earlier disinvestments. The P/E in earlier cases have been 37 (HTL), 63 (IBP), 11 (VSNL), 19 (Balco), 12 (CMC) and 26 (HZL). In case we take the conservative scenario discussed above, GOI receives Rs. 2,424 crore for 49.74% holding which means an equity value of Rs. 4,873 crore for MUL as a whole. The profit earned by MUL in 2001-02 was Rs. 55 crore. This gives a P/E ratio of about 89, which compares very well with P/E of the earlier disinvestments. 
  • Comparable Companies: Taking the conservative scenario discussed above, the per share value works out to about Rs. 3,684, which is far above the present Book Value of about Rs. 2,000 per share, resulting in price to book value ratio of 1.8. Also, it is higher than the valuation made by the three valuers. This is relevant as most automobile sector companies are currently trading at less than even their book values.

Background to Negotiations

  • MUL, India ’s dominant automobile manufacturer, is a joint venture of Government of India (GOI) and Suzuki Motor Corporation (SUZUKI). As on year ended March 31, 2001, MUL had an equity capital of 132.30 crore and a net worth of Rs. 2,642 crore. With the advent of competition, Maruti’s profitability has been under pressure
  • As per the existing joint venture agreement, both GOI and SUZUKI had joint control over the management of MUL and took turns in appointing the Chairman and Managing Director of the company. In addition, the joint venture agreement restrained the GOI from selling the shares of MUL to a third party without the consent of SUZUKI. 
  • The Government had decided in February 2001 on disinvestment in MUL through the option of MUL offering shares on a rights basis to existing shareholders with a renunciation option. Government constituted a Negotiating Team to negotiate on behalf of the Government with SUZUKI. The Team comprised of Secretary, Ministry of Disinvestment; Secretary, Department of Heavy Industry and Shri K.V. Kamath, Managing Director and CEO, ICICI Ltd. The Committee was asked to negotiate and finalise the modalities of disinvestment with SUZUKI.

Meetings with SUZUKI

  • The first round of meetings was held between the Negotiating Team of GOI and SUZUKI between 2nd March 2001 and 12th March 2001 at New Delhi . At the conclusion of the discussions, a record note of discussions was signed by both the parties on 13th March 2001. To summarise, both the sides had agreed that the roadmap for disinvestment of GOI shares in MUL would comprise of two phases– rights issue in the first phase and, after the completion of the rights issue, sale of existing GOI shares in the market in the second phase. It was acknowledged that this road map would help in bringing in capital into MUL required for its expansion and growth and at the same time lead to increase in the value of MUL and its share price discovery through a transparent manner, which would help determine the benchmark for further disinvestment.  
  • The value of the rights issue agreed upon was Rs.400 crore, which was arrived at primarily on the basis of the estimates of capex requirements in MUL. 
  • Regarding valuation of Maruti shares, it was agreed that GOI and SUZUKI would jointly identify and appoint three reputed valuers to determine the value of shares and the average of the three values accepted.  
  • KPMG, Ernst & Young and S.B. Billimoria were appointed as Valuers and they submitted their valuation reports in January 2002, copies of which were also made available to SUZUKI. The fair value per share recommended by the three valuers are Rs. 3,200 by KPMG, Rs. 3,142.18 by Ernst & Young and Rs. 3,500 by S.B. Billimoria. The average of the valuations made by three different valuers works out to Rs.3,280. 
  • After receipt of the valuation report, the second round of meetings was held between the Negotiating Teams of the GOI and SUZUKI between 12thFebruary 2002 and 29th April 2002 at New Delhi to arrive at an agreement on the price at which the rights issue would be made, the portion of the GOI’s rights share to be subscribed by SUZUKI, the renunciation premium and the control premium and modalities for the sale of existing shares held by GOI, etc. Discussions were also held to finalise the Revised Joint Venture Agreement. At the conclusion of the discussion, a record note of discussion was signed by both the parties.  
  • Kotak Mahindra Capital Company Limited (KMCC) acted as the financial advisor to GOI. Dua & Associates were legal advisors to the Government. 

    "In September 2005, the Government decided to disinvest 8% Equity (out of 18.28% Government of India Holding) to Indian Public Sector Banks. The Government sold 8% Equity (2,31,12,804 shares) for a consideration of Rs. 1,567.60 crore. The weighted average per share was Rs. 678.24.”

On 21st December 2006, the Cabinet Committee on Economic Affairs approved the disinvestment of residual 10.27% Government owned equity in Maruti Udyog Ltd. to the Public Sector Financial Institutions, Indian Public Sector Banks and Indian Mutual Funds. Expressions of Interest (EoIs) were received from 39 institutions/banks/mutual funds on 9th March 2007,. Out of the above 39 interested parties, 36 institutions/banks/mutual funds submitted the financial bids on 8th May, 2007 On the basis of the differential auction method, 32 institutions/banks/mutual funds were allocated shares. The total realization to the Government from the sale of 10.27% stake in Maruti Udyog Limited would be Rs. 2366.94 crore at a weighted average price of Rs. 794.49 per share.

Modern Food Industries Ltd. was incorporated as Modern Bakeries ( India ) limited in 1965. It had 2,042 employees as on 31st January 2000. It went through minor restructuring during 1991-94 when its Ujjain plant was closed, the Silchar project was abandoned and the production of Rasika drink was curtailed. The company was referred to the Disinvestment Commission in 1996. In February 1997, the Commission recommended 100% sale of the company, treating it in the non-core sector. While making this recommendation, the Disinvestment Commission cited underutilisation of the production facilities, large work force, low productivity and limited flexibility in decision-making, as some of its weaknesses.
In September 1997, the Government approved 50% disinvestment to a Strategic Partner through competitive global bidding. In October 1998, ANZ Investment bank was appointed as the Global Advisor for assisting in disinvestment. In January 1999, the Government decided to raise the disinvestment level to 74%, and an advertisement, inviting Expression of Interest from the prospective Strategic Partners, was issued in April 1999.
Pursuant to the advertisement and other marketing efforts by the Advisor, 10 parties submitted Expressions of Interest. Out of these, only 4 conducted the due diligence of the company, which included visits to Data Room, interaction with the management of the MFIL, and site visits. After due diligence, only 2 parties remained in the field, and on the last day for submission of the financial bid (15th October 1999), the only bid received was that from Hindustan Lever Limited (HLL). The Government approved the selection of HLL as the Strategic Partner in January 2000, and the deal was closed on 31st January 2000.
As per the accounting procedure prior to disinvestment (31st January 2000), MFIL did not make any provisions for old receivables outstanding for more than 5 years. After privatisation, the new management provided for all outstanding receivables that were over 3 years old, on the ground that it was warranted by the strict application of the accepted accounting principles. The revised accounts, thus prepared, showed an accumulated loss of Rs. 3,099.97 lakh, and Net Worth of Rs. 201 lakh. Since the Net Worth of the company got eroded by more than 50% of its peak Net Worth (Rs. 1,756.79 lakh) during the immediately preceding four financial years, MFIL had to file a report with the BIFR in accordance with the requirements of Sick Industrial Companies (Special Provisions) Act, 1985.
The following table shows the highlights of the Strategic Sale:

Post - Privatisation Scenario

    • The decline in the sales of Modern Bread, which continued till the beginning of 2000, has been arrested. Weekly sales in December 2000 were around 44 lakh SL, which is a 100% increase over the figure of April 2000
    • As on 31st December 2000, HLL has extended secured corporate loans to MFIL to the extent of Rs. 16.5 crore for meeting the requirement of funds for working capital and capital expenditure
    • HLL has provided a corporate guarantee to MFIL's banker, viz., Punjab National Bank, which has helped the Company in getting the interest rate reduced considerably to the extent of 3-4% of its earlier borrowing cost
    • Steps have been taken to improve the quality of bread, its packaging and marketing with trade-promotion activities, and to train the manpower in quality control systems
    • November 2002 wages have increased by an average of Rs.1,800 per employee
    • Rs. 30 crore has been spent on VRS and Rs. 7 crore  infused for safety & hygiene purposes at various manufacturing locations
    • The Government was also entitled to ‘Put’ its share of remaining equity of 26% at Fair Market Value for 2 years from 31st January 2001 to 30th January 2003. The Government hasd exercised this option and thereby received Rs. 44.07 crore on 28th November 2002

    Paradeep Phosphates Limited (PPL)

    • Paradeep Phosphates Limited was incorporated in December 1981.

    Key Financial Details as on 31stMarch 2001 All figures in Rs. crore

    Manpower as on 30thSeptember 2001
    Regular employees: 1150 approximately 
    Contract Labour: 1600 approximately

    • Manufacturing capacity per annum: 7.20 lakh tonnes DI-Ammonium Phosphate (DAP)

                                                                  2.25 lakh tonnes Phosphoric Acid
                                                                  6.60 lakh tonnes Sulphuric Acid

    • Total GOI loan (as on 31st March 2001): Rs.283.76 crore (will remain about Rs. 200 crore even after present restructuring) 
    • Outstanding Liability on account of payment due to OCP of Morocco, GCT of Tunisia & to MMTC: Rs. 856.34 crore 
      (The non-payment of dues of suppliers of Morocco & Tunisia have implications on relation of India with these countries) 
    • Key Financials from 1997-2001

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