AFM Project on

PUBLIC SECTOR UNITS

By Sneha Desai 11-713 Harshit Bafna 11-E05 Hemant Solanki 11-E45 Ryan Barboza 11 E54

Introduction In India, public sector undertaking (PSU) is a term used for a government-owned corporation (company in the public sector). The term is used to refer to companies in which the government (either the Union Government or state or territorial governments, or both) owned a majority (51 percent or more) of the company equity A Public Sector Undertaking is a corporation in the public sector in India, where management control of the company rests with the Government, it can be Central Government or the State Governments Objectives The main objectives of setting up the Public Sector enterprises as stated in Industrial Policy Resolution of 1956 were: 1. Social objectives a. To promote rapid economic development through creation and expansion of infrastructure b. To promote redistribution of income and wealth c. To create employment opportunities d. To promote balanced regional growth e. To encourage the development of small-scale and ancillary industries, and f. To promote exports on the one side and import substitution, on the other.

2. Political objectives a. To generate financial resources for development b. In public interest c. For national defense Classification of PSUs Classification of PSUs on the basis of their management 1. Central Public Sector Enterprise (run by central Government) a. Strategic business: national defense, Railways, atomic energy plants etc. b. Non strategic business : other than strategic 2. Public Sector Banks (run by central/ state Government) 3. State level Public Enterprise (run by state Government)

Classification of PSUs on the basis of their status 1. Maharatna a. Characteristics i. Govt. Conferred MAHARATNA Status on 16th Nov 2010 to 4 PSUs ii. Allows the PSUs to raise its Investment Ceiling from `1000 to `5000 cr. iii. Gives the PSU Autonomy to decide on investments up to 15% of their net worth in a project iv. Examples: Indian Oil Corporation, NTPC Ltd., Oil & Natural Gas Corporation, Steel Authority of India Ltd. b. Criteria for Maharatna status According to the criteria laid down by the Cabinet, the Maharatna status is granted to listed Navaratna central public sector companies with an average annual turnover of more than Rs 25,000 crore, net profit after tax of Rs 5,000 crore and net worth of Rs 15,000 crore during the past three year 2. Navratna a. Characteristics Navratna status gives a company enhanced financial and operational autonomy and empowers it to invest up to `1000 cr. or 15% of their net worth on a single project without seeking government approval. In a year, these companies can spend up to 30% of their net worth not exceeding ` 1000 cr. They will also have the freedom to enter joint ventures, form alliances and float subsidiaries abroad. Examples: Bharat Electronics Limited, Bharat Heavy Electricals Limited, Bharat Petroleum Corporation Limited, Coal India Limited, GAIL (India) Limited b. Criteria for Navratna Having a Miniratna Category I status Having at least 3 Excellent or Very good Memorandum of Understanding (MoU) for last 3 years On the basis of 6 identified parameters and their contributions, scores are given and a minimum of 60% is required for Navratna status Net profit to Net worth (25%) Manpower cost to cost of production services (15%) Gross Margin as capital employed (15%) Gross profit to turnover (15%) Earnings per share (10%) Inter-sectoral comparison based on net profit to net worth (20%)

3. Miniratna a. Characteristics These are PSEs that have made profits continuously for the last three years or earned a net profit of Rs. 30 crore or more in one of the three years. These miniratnas granted certain autonomy like incurring capital expenditure without government approval up to Rs. 500 crore or equal to their net worth, whichever is lower. b. Criteria for Miniratna Status i. Miniratnas have the authority to enter into joint ventures, set subsidiary companies, overseas office with certain conditions. They have been divided into 2 categories on the basis of there capital expenditure allowance. ii. The Category I kind of PSEs are the ones that have made profits continuously for the last three years or earned a net profit of Rs.30.cr or more in one of the three years. They do not have to take any government approval for the capital investments up to Rs.500.cr or equal to their net worth, whichever is lower. As on April 2011 there are 48 such PSEs. iii. The Category II kind of PSEs has made profits for the last three years continuously and should have a positive net worth. Unlike Category I PSEs, these PSEs can invest up to Rs.250.cr or up to 50% of their net worth whichever is lower. There are 15 such PSEs as on April 2011. Special Features of PSUs 1. Budget: the PSUs prepare a budget based on zero budgeting concept, keeping in kind attainable targets. This budget acts as a benchmark . The variance report shows the attained targets compared to the set ones. In case the budget turns out to be less than required, a revised budget has to be prepared. 2. financial advisor: responsibilities include a. determining financial requirements, sources through which they can be met b. appraisal of capital budgeting projects to determine economic viability and financial soundness c. review of financial results of all operations of enterprise d. study for reducing cost, enhancing profitability 3. accounts & audit: statutory audit as well as efficiency cum proprietary audit have to be carried out by the comptroller & auditor general of India 4. financial reporting: apart from internal financial reporting, PSUs have to submit a monthly report to admin ministry containing a. cost of production b. inventory holding period, c. income statement d. plan expenditure etc.

5. Financial Decisions a. Capital expenditure: Is governed by manual issued by planning commission. As per the manual, i. Project evaluation techniques like ROI, payback period, NPV, IRR, CPM, SWOT are to be used ii. Single discounting rate not for all projects (higher discount rate for higher risk) iii. Project appraisal for technical feasibility, economic viability, commercial profitability, financial soundness. iv. Expenditure allowed with prior gvt permission: e.g. companies like BHEL, MTNL, NTPC, ONGC etc. The entire funding is made by these companies themselves without any help from the govt in most cases Gross block profit (Rs. cr) Amount allowed (Rs. cr) 10 20 40 100

< 100 100-200 200-500 >500

b. financing i. Financing for the PSUs is provided by the central govt, state govt, financial institutions, banks, private parties etc. i.e. 90% of the funding for PSUs is provided by them ii. Internal sources: central & state govt equity subscription iii. External sources: public issue, loans, inter-corporate deposits iv. Debt : equity = 1:1, but debt is high v. Financial restructuring: writing off govt loan/interest, infusion of fresh capital vi. Extended repayment period

Advantages of PSUs Filling the Gaps in Capital Goods Employment Balanced Regional Development Contribution to Public Exchequer Export Promotion and Foreign Exchange Earnings Import Substitution Research and Development

Disadvantages of PSUs Poor Project Planning Over-capitalization Excessive Overheads Overstaffing Under-utilisation of Capacity Lack of a Proper Price Policy Inefficient Management

Privatisation Privatization is a process by which the government transfers the productive activity from the public sector to the private sector Characteristics Improvement in efficiency and performance Fixing responsibility is easier Response time incase of Private sector is less Privatization leads to better services to customers Remedial measures are taken early in private sector

Disinvestment Disinvestment refers to the action of the government in selling or liquidating an asset or subsidiary. In simple words, disinvestment is the withdrawal of capital from a country or corporation.

Objectives of disinvestment 1. 2. 3. 4. 5. 6. 7. Releasing large amount of public resources Reducing the public debt Transfer of Commercial Risk Releasing other tangible and intangible resources Expose the privatised companies to market discipline Wider distribution of wealth Effect on the Capital Market

Disinvestment policy 1. The salient features of the policy are a. Citizens have every right to own part of the shares of Public Sector Undertakings b. Public Sector Undertakings are the wealth of the Nation and this wealth should rest in the hands of the people c. While pursuing disinvestment, Government has to retain majority shareholding, i.e. at least 51% and management control of the Public Sector Undertakings 2. Present policy a. Restructure and revive potentially viable PSEs. b. Close down PSEs which cannot be revived. c. Bring down Government equity in all Non-strategic PSEs to 26% or lower, if necessary. d. Fully protect the interests of workers. Problems in disinvestment 1. Which areas should not be divested. 2. Whether defence, production & services should be disinvested and to what extent it is desirable in view of national security. 3. To what extent the method of divestment can be made open and transparent. 4. Out of the various methods of divestment which path will lead to fulfillment of declared 5. Should the foreign private investors be allowed to acquire controlling interest in PSEs. 6. How the social security net be instituted to train and re-employ active and able employees retiring under VRS. Methods of disinvestment 1. BIDDING: a. bids for portion of stake from govt FIs & mutual funds. b. Reserve price below which bids are not accepted. c. Bundles of shares d. Individual companies 2. SALE IN MARKET: public issue 3. GDR/ADR: not as profitable 4. CROSS HOLDINGS: e.g. cash rich oil companies subscribe to each others shares, IOC & ONGC

5. STRATEGIC SALE: sale of equity blocks to a single buyer, & transfer of management to him. E.g. Maruti, VSNL

Different approaches in disinvestment 1. Minority Disinvestment: Here, the company divests a part of its interest in the company, to make money, to resolve deficit, etc. Eg: the govt issued an IPO of a part of its controlling interest in Coal India inorder to raise money to cover the budget deficit 2. Majority Disinvestment : here, the govt parts with the controlling interest or it completely divests its interest from the company. Eg: the govt completely sold the Modern Foods company to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc. 3. Complete Privatisation: The govt transferred the entire management to private sector, for better productivity and performance. Egs: 18 hotel properties of ITDC and 3 hotel properties of HCI were privatized in a view to increase their performance and get better productivity.