divestment and disinvestmen

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Strategic Management  Divestment, Disinvestment & Liquidation Strategies PRESENTED BY: SANDEEP AMIYA RANJAN(12MFC010) RAKESH KUMAR SWAIN(12MFC018)

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Page 1: Divestment and Disinvestmen

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Strategic Management

Divestment, Disinvestment& Liquidation Strategies

PRESENTED BY:

SANDEEP AMIYA RANJAN(12MFC010)

RAKESH KUMAR SWAIN(12MFC018)

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Divestment

It is a form of retrenchment strategy used bybusinesses when they downsize the scope of theirbusiness activities or part of rehabilitation andrestructuring planDivestment usually involves eliminating a portion of abusiness.

Firms may elect to sell, close, or spin-off a strategicbusiness unit, major operating division, or productline

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Reasons to DivestDiversification of PortfolioMarket Share Too Small

Availability Of Better AlternativesNeed For Increased InvestmentLack Of Strategic FitLegal Pressures To Divest

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IMPLEMENTATIONOF

DIVESTMENT STRATEGIESFirms may pursue a divestment strategy by spinning off aportion of the business and allowing it to operate as anindependent business entity

Another way to implement a divestment decision is tosimply close a portion of the firm's operationsDivestment is not usually the first choice of strategy for abusiness. However, as product demand changes andfirms alter their strategies there will almost always besome portion of the business that is not performing tomanagement's expectations.

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Guidelines for Liquidation

If the only alternative is bankruptcy, liquidation is an

orderly alternative

When stockholders can minimize their losses by sellingthe firm‟s assets

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DisinvestmentDisinvestment is a process in which the publicundertaking reduces its portion in equity bydisposing its shareholding. “Disinvestment” as per

SEBI (substantial acquisition of shares) guideline,means the sale by the central government/stategovernment, of its shares or voting rights and/orcontrol, in PSUs. The disinvestment reduces

government participation in the company.

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Contd.In India , the new economic policy have given rise tosignificant focus for privatization of public sectorenterprises.

Hence, disinvestment is one of the method ofprivatization, which started in the year 1992.It implies selling of govt. equity shares of publicsector units in the market.It is a concrete step towards privatization andliberalization of our economy.

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Criteria for DisinvestmentThe decision regarding disinvestment or liquidationviewed in the light of following criteria:a) Whether the objectives of the company are

achieved

b) Whether there is decrease in number ofbeneficiariesc) Whether serving the national interest will be

affected because of disinvestmentd) Whether private sector can efficiently operate and

manage the undertaking.e) Whether the original rate of return targeted could

not be possible to achieve.f Whether socio-economic ob ectives lots its ur ose

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Merits of DisinvestmentIn Private Sector, the decision making process is quickand decisions are linked with the competitive marketchanges.The disinvestment process would bring in better

corporate governance, exposure to competitive,corporate responsibility, improvement in workenvironment etc. The market participation in capital of PSUs through stock

exchanges would enable the market to discover thelatent worth of PSUs. The Loss making PSUs can be successfully revived byasking the strategic partner to infuse fresh capital andexercising excellent management control over sick PSUs

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Demerits ofDisinvestment

Selling of profit-making and dividend paying PSUwould result in loss of regular source of income tothe government.

There would be chances of „asset stripping‟ by thestrategic partner. Most of the PSUs have valuableassets in the shape of plant and machinery, land andbuildings etc.

The Government‟s Policy or disinvestment includesthe disposal of both profit making, as well potentiallyviable PSUs.

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Disinvestment:

The following are the main objectives of thedisinvestment policy of the government:(a) To reduce financial burden on the government(b) To encourage wider share of ownership

(c) To introduce competition and market discipline(d) To help public enterprise upgrade their technology

to become competitive(e) To rationalize and retain their workforce(f) To improve efficiency and productivity in public

enterprise through new industrial policies.

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Modalities of Disinvestment:

In order to achieve the various objectives andgoals of disinvestment many methods have beenformulated and implemented. These includes:

(1) Public Offer: offering shares of public sector

enterprises at a fixed price through a generalprospectus, the offer is made to the general publicthrough the medium of recognized marketintermediaries.

(2) Cross Holding: In the case of cross holding, thegovt. would simply sell part of its share of onePSU to one or more PSU‟s .

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Contd.3) Golden Share: in this model, the govt. retains a 26

percent share in the PSU. This 26 percent share willcontinue to give the govt. the status of majority shareholder.

(4) Warehousing: Under this model, the govt. ownedfinancial institutions were expected to buy the govt. ‟s share in select PSU‟s and holding them until thirdbuyer emerged.

(5) Strategic Sale: Under this model, govt. sells a majorportion (51% and above) of its stake to the strategicbuyer and also gives over the management control.