1. Cabinet to consider 5 methods for strategic sale valuation

Cabinet to consider 5 methods for strategic sale valuation

The finance ministry is likely to propose to the Cabinet at least five different methods, including relative peer review and discounted cash flow, for valuation of over a dozen PSUs across sectors identified for strategic stake sale.

By: | New Delhi | Published: October 24, 2016 3:23 PM
Finance Minister Arun Jaitley had in his Budget for 2016-17 set a target of garnering Rs 20,500 crore from strategic sales this fiscal. (Reuters) Finance Minister Arun Jaitley had in his Budget for 2016-17 set a target of garnering Rs 20,500 crore from strategic sales this fiscal. (Reuters)

The finance ministry is likely to propose to the Cabinet at least five different methods, including relative peer review and discounted cash flow, for valuation of over a dozen PSUs across sectors identified for strategic stake sale.

With privatisation of PSUs being considered after a gap of over 12 years, the ministry feels that valuation of equity becomes important in the case of strategic sale of companies that are not listed or in cases where capital markets may not fully reflect the intrinsic worth of a share disinvested earlier.

“The use of a particular method of valuation will depend on health of the company, the sector in which it operates and the company’s intrinsic strength,” an official told PTI.

For this, the ministry has proposed at least five different valuation methodologies, including balance sheet method, transaction multiple, and asset valuation procedure, for these PSUs which will be up for outright sale or involves lowering of government equity below 50 per cent.

NITI Aayog has prepared a list of public sector units where the government can sell its majority stake to private companies in order to bring in greater efficiency and professionalism in functioning.

Based on its suggestions, the Department of Investment and Public Asset Management (DIPAM) has finalised a model of strategic disinvestment.

PSUs identified for strategic sale reportedly include profit-making Bharat Earth Movers and Certification Engineers International as well as loss-making Scooters India.

Another source said the Cabinet in its next meeting is likely to consider the strategic stake sale proposal.

While valuing a company, the officials will analyse its historical performance, its competitive positioning in the industry, inherent strengths/weaknesses of the business and the opportunities/threats presented by the environment, forecasting operating performance and the global industry outlook, among others, the official explained.

The government has been shedding a minority stake of 5-15 per cent in state-owned companies across sectors through offer for sale (OFS). But after a 12-year hiatus, it has revived the strategic disinvestment plans and would bring down its holding in the PSUs to below 50 per cent.

Finance Minister Arun Jaitley had in his Budget for 2016-17 set a target of garnering Rs 20,500 crore from strategic sales this fiscal.

The last strategic sale took place in Jessop and Co in 2003-04 under the NDA government headed by Prime Minister Atal Bihari Vajpayee when 72 per cent of government stake was sold to Indo Wagon Engineering for Rs 18.18 crore.

Incidentally, the first strategic sale in a PSU also happened under NDA rule in 1999-2000 when the government sold 74 per cent equity in Modern Food Industries to Hindustan Lever for Rs 105.45 crore.

During 1999-2000 and 2003-04, the government had strategically divested stake in 16 PSUs to garner a total of Rs 6,344.35 crore. These included sale of fuel retailer IBP Ltd to state-owned Indian Oil Corp (IOC) for Rs 1,153.68 crore.

Indian Petrochemicals Corp Ltd (IPCL) was sold to Reliance Industries for Rs 1,490.84 crore, Videsh Sanchar Nigam Ltd to Tata Group firm for Rs 1,439.25 crore and Hindustan Zinc Ltd to Vedanta Group for a total consideration of Rs 768.88 crore.

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