[Econ] Disinvestment in India

Economics

Disinvestment

Disinvestment in India

·        Disinvestment: When Government sells its shares of a PSU, to private sector company / individual.

·        Privatization: when Government sells so many shares, that it no longer remains the majority shareholder of the given PSU.

1991	Interim budget, Government announced 20% disinvestment in selected PSUs. Their shares were sold to Mutual funds and financial institutions (UTI, EPFO, LIC etc.)
1992	Government decides to sells shares to FIIs, PSU employees and banks.
1993	Rangarajan Committee suggests: 49% disinvestment in PSUs reserved for public sector 74% disinvestment in all other PSUs Government did not implement.
1996	Disinvestment commission under GV Ramakrishna. It was a non-statutory, advisory body (similar to UPA’s NAC).
1998-2000	Vajpayee Government classifies PSUs into two parts (1) Strategic: arms-ammunition, railway, nuke energy etc.=> here we won’t do disinvestment (2) Non-strategic: those not in above category.=> here we will do disinvestment in a phased manner. Hindustan Zinc, BALCO, Maruti Disinvestment taken up. To implement above policy, Department of disinvestment setup under Finance ministry.
2004	UPA comes into power, Common Minimum program (CMP) updates disinvestment policy * Sick PSUs will be revived * No disinvestment in profit making PSUs * PSUs will get commercial autonomy
2005	Whatever Money Government earns from selling its PSU shares- it’ll goto National investment fund (NIF).
2005-2009	Disinvestment remains stagnant because Left allies of the UPA Government stonewall everything.
2009 onwards	UPA-2 without left parties. Government resumes disinvestment process. All PSUs can be disinvested, but upper limit: 49% Disinvestment Method: only public offer.
2013-2014	Chiambaram wanted to earn 40,000 crores via disinvestment of Indian Oil, BHEL, NHPC, Neyveli lignite etc. but hardly managed to get ~16,000 crores. Main reasons for #EPICFAIL: * Oil ministry, mining ministry, trade unions opposed the move, files were delayed. * Lukewarm response from investors because sharemarket was down due to internal & external factors.
2014	Modi cabinet approves disinvestment in NHPC, Coal India, ONGC 6 failed PSUs will be closed down. 5 loss making but viable PSUs will be revived.

Methods of Disinvestment:

Via IIP	Via Stock Exchange
Via Institutional placement program. Directly selling the shares to another company / institution / mutual fund or other large player.	Directly selling shares on stock exchange
Requires more clearances.	Faster, needs less clearances. SEBI requires in each PSU, minimum 25% shares be held by public. Hence Government using this method to quickly comply with SEBI norms.
Friendly to institutional investors (Mutual funds, pension /insurance funds etc.)	Friendly to retail investors.

Pro and Anti arguments for Disinvestment:

Against	Favour
Socialist / leftist ideology: private sector cannot achieve equal distribution of resources for all classes. Private enterprises only focus on profit maximization. They won’t cater poor people. Therefore Government needs to control all or some industrial sectors.	Such Government controlled units cannot compete in free market economy due to political interference and price control mechanisms. Ultimately more public money is wasted in running these loss making entities.
Government’s dividend income will decline. (Because they’ll have less shares). Consequently, Fiscal deficit will increase.	Whatever “dividend” Government earned so far- compared to that, Government has spent far more crores rupees to revive these PSUs. There is no point in throwing good money after bad money.
A survey indicated 0.5% retail participation (i.e. Aam Admi investment) in equity market. Meaning, only Large corporates and financial institutions will benefit from this drive. It’ll not help in “financial inclusion”	Absurd logic, that just because corporates will benefit, we shouldn’t begin disinvestment. Government already taken plenty of initiatives on financial inclusion front.
The funds received from disinvestment are used to finance fiscal deficit. This is unhealthy practise, like selling family gold to buy daily dose of desi liquor.	Need amendments in FRBM act to ensure this doesn’t happen.
After disinvestment employees of PSUs will loss their jobs If board of directors have many private sector experts- they may approve plans to reduce staff strength, to increase profitability.	Overstaffing = One of the main reasons why PSUs don’t make optimum profit. At some point we’ve to swallow the bitter pill. Besides, such employees are given attractive VRS offers.
Disinvestment would lead to private monopolies	That used to happen in 90s era, when Government sold shares to specific private companies at an arbitrary price. But, Unlikely to happen if shares directly sold via stock exchange. + CAG, Media very active these days.
To complete the disinvestment targets, Government asks one PSUs to buy shares of another PSU. e.g. ordering LIC to buy ONGC’s shares…. In such cases, disinvestment doesn’t decrease Government control over those companies.	Need for a clear policy on disinvestment to stop this practice.

Modi’s disinvestment:

Org	Under Ministry	Govt Shareholding	Approved Disinvestment	Issue
NHPC	Power	86%	11.36%	Has 20 hydroelectric power stations. Unable to recover dues from electricity utility companies => company making huge losses. Hence it share price won’t fetch truckload of cash to Government.
CIL	Coal	90%	10%	Labour union strike may bring down share price. So Government may not earn truckload of cash from selling these coal India shares.
ONGC	Petroleum	69%	5%	Maharatna PSU If Government clears the gas price policy, ONGC’s share prices will go up (And after that Government should sell it- to earn truckload of cash).
Note: in PSUs, Government owns the shares, in the name of President of India.

 Union Government finished reviewing 11 PSUs: 5 worth savings and 6 worth closing.

5 worth saving	6 Failed ones
(1) HMT Machine Tools (2) Heavy Engineering Corporation (3) NEPA (4) Nagaland Paper & Pulp Co (5) Triveni Structurals	(1) Hindustan Photo Films (2) HMT Bearings (3) HMT Watches (4) HMT Chinar Watches (5) Hindustan Cables. (6) Tungabhadra Steel Products Ltd
	These will be given 1000 crore rupees to give VRS to employees then shut down operations. Total employees ~3600

HMT watches in news, because they’ve tied up with flipkart.com to sell away the remaining stock of wrist watches.

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[Econ] P - Notes

Economics

P – Notes

·        Participatory Notes (P-Notes) are instruments issued by registered FIIs (Foreign Institutional Investors) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with SEBI.

·        Investing through P-Notes is very simple and hence very popular amongst FIIs

·        P-Notes mainly used in stock markets

·        They are not used within the country

·        They are used outside India for making investments in shares listed in the Indian stock market. Hence called as “offshore derivative instruments”

What is P-Notes /Participatory Notes?

·        Tom Cruz wants to get maximum return on the investment in quickest possible time.

·        For this, Tom will have to find risky securities (shares/bonds) in third world countries, then invest money from one country to another quickly, depending on how share market moves.

·        In India, no one can invest in share market without getting PAN card + DEMAT account first. Other nations too have similar mechanism.

·        But if Tom tries to get PAN card and DEMAT account in each third world country, then his profit will decline- given the cost of running branch office, staff salary, DEMAT fees etc. in each country.

·        So, to take a shortcut, Tom will contact some ‘middleman’ who is already registered as an FII, has PAN card & DEMAT in India. e.g. HSBC.

·        Tom gives money to HSBC, with instruction “buy A, B and C shares/bonds in X, Y and Z quantity.”

·        HSBC buys Indian shares. They’ll be stored in DEMAT account of HSBC, and won’t be given to Tom.

·        But HSBC then gives a receipt to Tom listing the shares/bonds purchased on his behalf and stored in HSBC’s DEMAT account.

·        This receipt is called Participatory Note.

·        Technically, it is called “offshore derivative instrument”. Observe the words

OFFSHORE (Because foreigner owning something in India, without coming to India or opening office in India)

DERIVATIVE (Because this receipt doesn’t have value of its own; It “derives” its value from the market value of shares/bonds held by HSBC. Today it may be worth $1000, tomorrow $12000 depending on how the prices of Indian securities move)

INSTRUMENT (Self-explanatory- this is one type of financial instrument to invest abroad)

·        1992: SEBI had permitted P-notes, to boost foreign investment in India, after BoP crisis of 1991.

·        P-note owner doesn’t own the shares. (because they’re in the DEMAT account of that intermediary FII)

·        P-Note owner doesn’t have voting rights in the shareholder meetings

Why Ban Participatory Notes (P-notes)?

·        As of March 2014, Foreigners invested ~Rs. 2 lakh crore in India via P-notes. (this is 13% of the total FII money coming in India)

·        As such the FII has to disclose P-note owner data to SEBI on quarterly basis (every 3 months). But often, within 3 months the P-notes would have changed many hands (e.g Tom to Jerry to Micky to Goofy).

·        Thus P-note investments are Anonymous. Hard to trace the owner. Can be used for money laundering and terror financing.

·        Hot Money: can leave Indian market very soon based on just one phone call from Tom Cruz to HSBC. Hot money creates heavy rise or fall in share market, so even genuine investors’ money is lost.

·        e.g. Tom continuously buys Infosys shares, they goup to Rs.3000 per share. So, you (indian) also buy, thinking “Infosys will go even higher to 3500, and I’ll make profit”.

·        But suddenly tom sells everything, to invest in China for better return.

·        Now Infosys sells not even for 2000. Then you (Indian investor) lost 1000.

P-Notes, Money laundering & Terror Financing:

·        Finance Ministry Whitepaper: Indians first send their money to Cayman Islands, British Virgin Islands, Switzerland, or Luxembourg via Hawala operators. Then, their agents convert rupees to dollars, re-invest it in Indian market through P-notes. It is possible to hide the identity of the ultimate beneficiaries, because of these multiple layers. Thus, P-notes are used in money laundering.

·        Ex-National security Advisor MK Narayanan: Terrorists are using P-notes to invest in Indian stock market, and using the same profits to finance terror operations against India. They may use this mechanism to first boost Indian stock exchange, then collapse it by quickly pulling out money from the market. Doubt: how can a poor Pakistan afford creating volatility in Indian market? Ans. Via printing fake Indian currency, converting it to dollars in a tax haven, to buy P-notes via a post office company!

·        RBI’s Tarapore Committee: Recommended Banning P-notes for national security and to stabilize stock exchanges

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