Question 1: Why does the Government disinvest CPSEs ?
Answer: The objectives of disinvestment are:
- Improve corporate governance.
- Realize the productive potential of CPSEs through improved efficiency and profitability.
- CPSEs’ wealth should rest in the hands of the people.
- Raise resources for the Government.
Question 2: How does disinvestment help CPSEs and the Government?
Answer: Disinvestment helps CPSEs and in the Government the following manner:
- To promote people’s ownership of Central Public Sector Enterprises (CPSEs) to share in their prosperity through disinvestment.
- The process of listing of CPSEs on stock exchanges facilitates development and deepening of capital market and spread of equity culture.
- Helps raise budgetary resources for the Government.
- Enables efficient management of public investment in CPSEs for accelerating economic development and augmenting Government’s resources for higher expenditure.
Question 3: What are the Salient features of Current Disinvestment Policy?
Answer: The salient features of the current disinvestment policy are:
- Public Sector Undertakings are the wealth of the Nation and to ensure this wealth rests in the hands of the people, promote public ownership of CPSEs;
- While pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e. at least 51 per cent of the shareholding and management control of the Public Sector Undertakings;
- Strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs upto 50 per cent or more, alongwith transfer of management control.
Approach for Disinvestment
(a) Disinvestment through minority stake sale
On 5th November 2009, Government approved the following action plan for disinvestment in profit making Government companies:
(i) Already listed profitable CPSEs (not meeting mandatory shareholding of 10 per cent which stands revised to 25 per cent) are to be made compliant through offer of sale by the Government or by the CPSEs through issue of fresh shares or a combination of both;
(ii) Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding consecutive years to be listed;
(iii) Follow-on public offers would be considered, taking into consideration the needs for capital investment of CPSEs on a case by case basis, and the Government could simultaneously or independently offer a portion of its equity shareholding;
(iv) All cases of disinvestment are to be decided on a case by case basis;
(v) The Department of Investment and Public Asset Management (DIPAM) is to identify CPSEs in consultation with respective administrative ministries and submit proposal to Government in cases requiring offer of sale of Government equity.
(b) Strategic Disinvestment
(i) To be undertaken through a consultation process among different Ministries/Departments, including NITI Aayog.
(ii) NITI Aayog to identify CPSEs for strategic disinvestment and advice on the mode of sale, percentage of shares to be sold of the CPSE and method for valuation of the CPSE.
(iii) The Core Group of Secretaries on Disinvestment (CGD) to consider the recommendations of NITI Aayog to facilitate a decision by the Cabinet Committee on Economic Affairs (CCEA) on strategic disinvestment and to supervise/monitor the process of implementation.
(c) Comprehensive management of GoI’s investment in CPSEs
- The Government recognises its investment in CPSEs as an important asset for accelerating economic growth and is committed to the efficient use of these resources to achieve optimum return.
- The Government will achieve these objectives by adopting a comprehensive approach for addressing critical inter-linked issues such as leveraging of assets to attract fresh investment, capital restructuring, financial restructuring, etc.
- Different options for optimal utilization of Government’s investment in CPSEs are assessed to adopt suitable investment management strategies to improve investors’ confidence in the CPSEs and support their market capitalization which is essential for raising fresh investment from the capital market for their expansion and growth.
- Efficient management of investment in CPSEs are ensured through rationalization of decision making process for all related issues and seamless inter-departmental coordination in the matter.
Question 4: What is the current strategy for investment management of CPSEs?
Answer: As highlighted in FM's Budget Speech, the Government recognises its investment in CPSEs as an important asset for accelerating economic growth and is committed to the efficient use of these resources to achieve optimum return on its investment.
Keeping the above objectives in mind, the current investment management strategy of the Government focuses on efficient management of GoI's investment in CPSEs, disinvestment through minority stake sale in listed CPSEs, listing of profitable CPSEs and strategic disinvestment of CPSEs. These strategies are helping the Government to move in the direction, where best possible outcomes are expected in terms of improving investors' confidence in CPSEs and supporting their market capitalization essential for raising fresh investment for expansion and growth.
Question 5: What are the methods of disinvestment of minority stake in CPSEs?
- Initial Public Offering (IPO) – offer of shares by an unlisted CPSE or the Government out of its shareholding or a combination of both to the public for subscription for the first time.
- Further Public Offering (FPO) – offer of shares by a listed CPSE or the Government out of its shareholding or a combination of both to the public for subscription.
- Offer for sale (OFS) of shares by promoters through Stock Exchange mechanism – method allows auction of shares on the platform provided by the Stock Exchange; extensively used by the Government since 2012.
- Strategic sale – sale of substantial portion of the Government share holding of a central public sector enterprise (CPSE) of upto 50%, or such higher percentage as the competent authority may determine, along with transfer of management control.
- Institutional Placement Program (IPP) – only Institutions can participate in the offering.
- CPSE Exchange Traded Fund (ETF) – Disinvestment through ETF route allows simultaneous sale of GoI's stake in various CPSEs across diverse sectors through single offering. It provides a mechanism for the GoI to monetize its shareholding in those CPSEs which form part of the ETF basket.
Question 6: What are the steps in the CPSEs’ disinvestment process ?
Answer: The policy of minority stale sale has a evolved over time and is based on a transparent decision making process through inter-Ministerial consultations. The current disinvestment process involves the following steps:
(i) In-principle consent by the Administrative Ministry of the CPSE concerned;
(ii) Approval of the proposal to disinvest by CCEA;
(iii) Constitution of an Inter-Ministerial Group (IMG) with the approval of the Finance Minister to guide and oversee the disinvestment process;
(iv) IMG appoints Advisers for the transaction including Merchant Bankers/ Book Running Lead Managers (BRLMs)/ Legal Advisers;
(v) Presentation by BRLMs before High Level Committee (HLC) on valuation;
(vi) HLC recommends price band/ floor price to alternative mechanism (AM) taking into consideration the recommendation of the BRLMs;
(vii) Approval by AM of recommended price band/ floor price, method of disinvestment, price discount for retail investors, etc.
Question 7: What are the advantages of OFS process?
Answer: OFS has the following advantages over FPOs/IPOs:
Cost effective: OFS route involves less formalities. Unlike IPOs/FPOs, the promoters of the issue under OFS are not required to file Draft Red Herring Prospectus (DRHP). Also, there is no need to get the application forms printed. It also saves big advertisement expenses.
Saves Time: This route involves sale of shares in a single trading day and that too, during the normal trading hours i.e. between 9:15 a.m. and 3:30 p.m. The promoters can announce their intention of share sale even one trading day prior to the opening of the offer.
Transparency: OFS process is quite transparent as it is done on real-time basis with a system based bidding platform and involves least amount of paperwork.
Multiple Orders: Under OFS, there is no restriction on number of bids from a single buyer. This facility is not available in FPOs/IPOs.
Question 8: What are the steps taken by the Government to accelerate disinvestment process ?
- Rolling plan:
- As the earlier system of annual plans for disinvestment of CPSEs provided scope for price hammering through the announcement effect, this arrangement has been replaced with a system of rolling plan.
- Making a departure from the system of annual plan, the Government has started creating a pipeline of proposals by identifying some CPSEs for minority stake sales across various sectors of the economy.
- The underlying strategy is to keep the shares readily available for transactions, to take advantage of the market conditions without any loss of time with an element of surprise for the market players. This helps in minimizing price hammering during disinvestment of CPSEs.
- T-1 dispensation for Offer for Sale (OFS):
- Under the earlier dispensation of T-2 notice period (T being the transaction day) for an OFS transaction, there was enough scope for price hammerings during the trading in the stocks on T-1 day, i.e. the day immediate before the OFS issue.
- Based on the suggestion made by the Department, SEBI vide its circular dated 15th February, 2016 has reduced the notice period for an OFS transaction from T-2 to T-1. In the other words, the OFS transactions takes place on the very next day after the notice for the issue has been given to the stock exchanges.
- This change is now helping in minimising price hammering between the notice day and the transaction day, taking place earlier under the T-2 dispensation.
- Need for evolving an Equity Culture:
- CPSEs’ disinvestment programme has been made more inclusive by following an approach to reserve 20 per cent of shares on PSUs-OFS transactions with a price discount upto 5 per cent for retail investors.
- Vide SEBI’s circular dated 15th February, 2016, the retail investors have also been allowed to bid in an OFS issue on T+1 day so that their interest are suitably protected by providing them sufficient time for arranging funds and encouraging them for participating in CPSEs’ disinvestment program.
Question 9: Has the Government issued any guidelines on “Capital restructuring of CPSEs” ?
Answer: In line with announcement made in the budget, comprehensive guidelines on “Capital Restructuring of CPSEs” have been issued on 27.05.2016 by the Department of Investment and Public Asset Management (DIPAM). These guidelines supersede all previously issued guidelines on the subjects under reference by various Ministries/Departments from time to time and comprehensively deal with the inter-related issues on payment of dividend, buy back of shares, issue of bonus shares and splitting of shares .
Question : What are the salient features of Capital Restructuring Guidelines ?
Answer: Some of the salient features of these Guidelines are as follows:
- These guidelines shall apply to all corporate bodies where GoI and/or Government controlled one or more body corporates have controlling interest. It will not apply to body corporate which is prohibited from distribution of profits to its members, e.g. companies set up under section 8 of companies Act, 2013 or under extant provision of any other Act or which has accumulated losses.
- The focus of these guidelines is on optimum utilization of funds by CPSEs/Government to spur economic growth. The CPSEs will have a professional look at the surplus funds available with them and if they do not have plans to deploy them optimally for business purposes, they should explore other options of capital restructuring. The CPSEs have been given the flexibility to adopt suitable investment management strategies for raising fresh investment from the capital market for expansion and growth.
- The GoI’s nominee director(s) on the board of CPSEs have been made more responsible by ensuring that GoI’s interests as a majority shareholder investor are to be duly represented through them in the CPSEs. Hence, they should discharge their responsibility in a way to ensure efficient allocation of GoI’s investment in CPSEs for growth and economic development and compliance of the guidelines.
- In case any CPSE is not able to comply with any of the above guidelines due to some unforeseen exceptional situation, provisions have been made to ensure that such issues are duly considered upto certain level by the Administrative Ministry in consultation with the Financial Adviser for providing exemptions to CPSEs through a well defined procedure, on a case to case basis.
Question 10: What is Central Public Sector Enterprises (CPSE) Exchange Traded Fund (ETF)?
- An Exchange Traded Fund (ETF) is a security that tracks an index like an index fund, but trades like a stock on an exchange. Constituent stocks are listed and actively traded, and may have representation from various sectors to provide ETF unit holders adequate diversification.
- Disinvestment through the ETF route allows simultaneous sale of GoI stake in various CPSEs across diverse sectors through a single offering and avoids the necessity to go to the market repeatedly for divesting different stocks. The CPSE-ETF provides a mechanism for the GoI to monetize its shareholding in those CPSEs that eventually form part of the CPSE ETF basket, in a stock-neutral, time-efficient and non-disruptive manner.
- The CPSE-ETF approved in May, 2013 comprises stocks of listed CPSEs with disinvestment upto 3% of GoI shareholding from an individual CPSE constituent of ETF. The CPSE-ETF approved basket comprises 10 scrips, namely, BEL, CIL, EIL, CONCOR, GAIL, IOL, OIL, ONGC, PFC & REC. The Government realized an amount of Rs. 3000 crore as disinvestment proceeds through New Fund Offer (NFO) of CPSE-ETF scheme launched in March, 2014.
Question 11: How are the disinvestment proceeds used ?
Answer: The proceeds of disinvestment are credited into National Investment Fund (NIF) constituted in November, 2005 and are used for the approved purpose, as decided from time to time.
Presently, the disinvestment proceeds are credited to the existing NIF which is a ‘Public Account’ under the Government Accounts and the funds would remain there until withdrawn /invested for the approved purposes. The NIF is utilized for the following purposes:
- Subscribing to the shares being issued by the CPSEs on rights basis, so as to ensure that 51% ownership of the Government in CPSEs is not diluted.
- Preferential allotment of shares of the CPSE to promoters as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 so that Government shareholding does not go down below 51% in all cases where the CPSE is going to raise fresh equity to meet their Capex program.
- Recapitalization of public sector banks and public sector insurance companies so as to strengthen them through further capital infusion towards achieving the Basel III norms.
- Investment by Government in RRBs/IIFCL/NABARD/Exim Bank;
- Equity infusion in various Metro projects;
- Investment in Bhartiya Nabhikiya Vidyut Nigam Limited and Uranium Corporation of India Ltd.
- Investment in Indian Railways towards capital expenditure.
Question 12: What are the disinvestment targets and receipts over the years?
Answer:The disinvestment targets and achievements during the last five years is shown in the table below:
(in Rs. Crore)
*An additional amount of approx. Rs. 8152 crore has also been realised through sale of bonus debentures to EPFO (NTPC) respectively.