DAYALBAGH EDUCATIONAL INSTITUTE

SYNOPSIS PRESENTATION ON COMPARATIVE ANALYSIS ON PRE AND POST DISINVESTMENT SCENERIO IN GAIL

Research Supervisor:Submitted by:Dr. P. D. Saini Gautam Faculty of commerce

Sarita 082058

D.E.I 5th Sem.

B.Com

THE IMPACT OF DISINVESTMENT ON FINANCIAL PERFORMANCE OF GAIL { Pre and Post Scenerio}

INTRODUCTION

Disinvestment was conceived in the context not only of the acute financial stringency of the Government of India, which had to continually provide budgetary support to Loss-making units, but also of the failure of public sector as a whole to provide a reasonable rate of return on the total investments in 240 undertakings. Its aim was to break away from the regime of dysfunctional bureaucratic mismanagement and inefficiency of the public sector. The process which commenced in 1992 with the selling of equity of select PSUs has now gained momentum and the companies have been put on sale. The poor performance of the PSUs has always been attributed to the bureaucratic control of Government in these units and disinvestment is thought out to be its prescription. Investment and disinvestment are two sides of the same coin. When we deal with the investment management, it automatically encompasses disinvestment also, as what is investment for one is disinvestment for another, particularly in the secondary market. It investment is an art and science, the more so is the disinvestment process.

What is Disinvestment
Investment refers to conversion of money or cash into securities, debentures, bonds or any other claims on money. At the same time, disinvestment involves the conversion of money claims or securities into money or cash. A reduction in capital investment reflected by a decrease in capital goods and a company's decision not to replace depleted capital goods. The sale or elimination of a department, subsidiary, or any other major investment. Disinvestment is most common when a company must raise capital quickly to finance new operations or pay a certain liability, or when it determines that the investment is unlikely to become or remain profitable in the future. In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a government-owned enterprise. A company or a government organisation will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general/specific needs. In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as an active tool to reduce the burden of financing the PSUs. The following main objectives of disinvestment were outlined: To reduce the financial burden on the Government To improve public finances To introduce, competition and market discipline To fund growth To encourage wider share of ownership To depoliticise non-essential services

Disinvestment of Public sector undertakings Disinvestment is a wider term extending from dilution of the stake of the government to a level where there is no change in the control to dilution that results in the transfer of management. The transfer of ownership may occur when in an enterprise the dilution of government ownership is beyond 51 percent. The disinvestment implies that the government will sell to public or private enterprises / public institutes part of its holding in public sector enterprises.

Problems of Public sector undertakings

The most important criticism levied against public sector undertakings has been that in relation to the capital employed, the level of profits has been too low. Even the government has crticised the public sector undertakings on this count. Of the various factors responsible for low profits in the public sector undertakings, the following are particularly important :i. Price policy of public sector undertakings ii. Under utilization of capacity iii. Problem related to planning and construction of projects iv. Problems of labour, personnel and management v. Lack of autonomy The government in order to put an end to these problems, decided to disinvest its stake in the PSUs. The companies traditionally established as pillars of growth have now become a burden on the economy. Except few mighty oil and petroleum companies, almost all other PSUs are incurring losses. The national gross domestic product and gross national savings are also adversely effected by low returns from PSUs. About 10 to 15 % of the total gross domestic savings are reduced on account of low savings from PSUs.

GAS AUTHORITY OF INDIA LIMITED

(GAIL)

GAIL (India) Limited, is India's flagship Natural Gas company, integrating all aspects of the Natural Gas value chain (including Exploration & Production, Processing, Transmission, Distribution and Marketing) and its related services. In a rapidly changing scenario, we are spearheading the move to a new era of clean fuel industrialisation, creating a quadrilateral of green energy corridors that connect major consumption centres in India with major gas fields, LNG terminals and other cross border gas sourcing points. GAIL is also expanding its business to become a player in the International Market. 10% stakes are sold by Government in the year 2003-04.

REVIEW OF LITERATURE:-

1. Disinvestment of Indias Public Sector Units:- By Bhole, L.M.

In this study contains the role of state Vs. market in development economies and policy. It is also contended that the functioning of many public sector units (PSUs) has been characterized by low productivity, unsatisfactory quality of goods, excessive manpower utilization, inadequate human resource development and low rate of return on capital. For instance, between 1980 and 2002, the average rate of return on capital employed by PSUs was about 3.4% as against the average cost of borrowing, which was 8.66%. Disinvestment (or divestment) of the PSUs has therefore been offered as one of the solutions in this context. Disinvestment is generally expected to achieve a greater inflow of private capital and the use of private management practices in PSUs, as well as enable more effective monitoring of management discipline by the private shareholders. Such changes would lead to an increase in the operational efficiency and the market value of the PSUs. This in turn would enable the much needed revenue generation by the government and help reduce deficit financing. The actual receipts through disinvestment have often fallen far short of their target . During the period 1991-92 to 2002-2003, the government had targeted the mobilization of about Rs. 78,300 crores through disinvestment, but it could actually mobilize only Rs. 30,917 crores. If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically, issues such as - the correct valuation of shares, the crowding out possibility, the appropriate use of disinvestment proceeds and the institutional and other prerequisites.

2.Disinvestment and corporate performance :-by Chandawat, D.S., Bhanawat, Shurveer S.and Mehta,Ranu
This extension emphasizes the importance of disinvestment on the financial performance of selected public sector undertakings. This study is an explanatory research. The impact of management change on the financial performance, it was desirable to take up those units in which more than 50 percent disinvestment has taken place before august 2001. For this study purpose authors can take the following samples: Lagan Jute Machinery Company Limited (LJMCL) Modern Food Industries (India) limited (MFIL) Bharat Aluminium Company Limited(BALCO)

This study shows that the operating performance has deteriorated in the postdisinvestment period as compared to the pre-disinvestment period. The preliminary results of the disinvestment experience show that with the movement from public to private led to some improvement in the corporate performance of the divested units. While the assets utilization and short term liquidity management shows an increase in the efficiency, there has been a decline in the overall profitability of the firms. Moreover the hosts of factors playing the role directly or indirectly in the transition phase have to be kept in mind. Nevertheless, the empirical evidence to date seems to give some positive direction to the process of disinvestment.

3.Disinvestment in India:- By Naib, Sudhir

Twelve years after it was started, the liberalization of the Indian economy remains an ideological and operational battleground. There is mainstream national consensus on the need and irreversibility of reformes, but widespread disagreement about its pace and the sharing of its benefits. A basic aspect of the withdrawal of the state from the economic sphere has been the divestments to private parties of the shares (and in some cases control) of public sector enterprises (PSUs) or state owned enterprises (SOEs). This has affected thousands of Indians and triggered fierce political debates. The book gives a comprehensive roundup of the why and how of SOE privatization. It provides a perspective on the past, present and future of PSU divestment from someone who has studied the process up close. Before the commentary on the Indian experience, the book touches on the historical development of the idea of private enterprise in public works, and the major theoretical positions on the state versus private ownership debate. It provides a comprehensive review of the disinvestment process followed by India and analyze the impact of performance of the disinvested enterprises.

4.PUBLIC SECTOR PERFORMANCE SINCE 1950, A Fresh Look:- By Nagaraj,R.

The paper elicits that since the mid 1980s the public sectors share in domestic investment has been nearly halved, but its output share has remained roughly constant at about a quarter of GDP, suggesting a sustained rise in productivity over nearly two decades. The paper defines three major evidences for the improvement in performance: A rise in physical efficiency in electricity generation. A fall in public sector employment growth.

An increase in central public sector enterprises profitability (even after excluding the petroleum sector).

The author then goes ahead to question why then the public sector finances remained adverse. In electricity, passenger road transport and railways the revenue-cost ratio is less than one,and has declined since the early 1990s.Moreover, over the last 40 years, the public sector price deflator declined by 17 percentage points, relative to the GDP deflator. The author concludes that correct pricing and collecting user charges are probably key to setting public sector finances right.

5.Disinvestment in India, I lose and You gain:-by Baijal ,Pradeep

The process of disinvestment in India has been fraught with challenges and controversies. Disinvestment in India:-I lose and you gain, written by one who has been at the centre of all privatization debates and controversies, brings to light the facts that surrounds the disinvestment story. It underlines the most compelling rationales behind privatization, relief to the tax payer and the simultaneous need for funds for infrastructure development and social sector investment .This book traces privatization cycles across the globe through a historical perspective by looking at the privatization models and processes adopted in different countries. It also includes case studies of companies like BALCO, Maruti, Hindustan, Zinc, VSNL, Jessop and CMC, providing an insight into the different aspects of disinvestment. This book discuss the impact of privatization and disinvestment on companies, economies and other stake holders and serves to initiate a healthy and well informed debate on the basis of fact

6.Strategies of Disinvestment-Drawbacks & Evaluation:-by Kiran,Kranthi

This paper examines the idea or strategies behind what type of disinvestment is to sell the shares of the government in the public sector enterprises to external payers. What are the drawbacks of disinvestments. Author has studied case on BALCO. If disinvestment policy is to be in wider public interests, it is necessity to examine systematically isues such as correct valuation of shares and appropriate use of disinvestment proceeds. The disinvestment of public sector units which is , in fact, the public money is done without even due amount of debate in the parliament . This, therefore , calls for utmost care and meticulous planning.

NEED OF THE STUDYThe public sector in India at present is at cross roads. The new economic policy initiated in July 1991, clearly indicated that the public sector undertakings have shown a very negative rate of return on capital employed. On account of this phenomenon many public sector undertakings have become burden to the government. They are infact turning out to be liabilities to the government rather than being assets. This is a sector which the government clearly wants to get rid off. In this direction the government has adopted a new approach to reform and improve the public sector undertakings performance i.e 'Disinvestment policy'. This has gained lot of importance especially in latter part of 90s. At present the government seriously perceives the disinvestment policy as an active tool to reduce the burden to financing the public sector undertakings. Strategies are formulated in the light of objectives, and therefore play an important role in their accomplishment. An important aspect in the management of public sector enterprises is there relevance of the strategic financial planning technique in dealing with conflicting objectives. Objectives of public sector enterprises are conflicting because majority shareholder is the Government. In the case of public ownership, the management of firms can be regarded as agents acting for the government to which they are responsible. As compared to private ownership, differences between managers and their immediate principals in public ownership arise from following facts:(a) Principals do not typically seek to maximize profits. (b) There are no marketable ordinary shares in the firm, and hence no market for corporate control. (c) There is no direct equivalent of the bankruptcy constraint on financial performance. Thus the purpose of the present study is to analyze the impact of change in the ownership (reduction in governments ownership) on various financial parameters of a public sector company.

OBJECTIVES

1. To study the Pre and Post disinvestment scenario of GAIL. 2. To study the effect on financial performance of GAIL after disinvestment.

RESEARCH METHODOLOGY
The methodology of research is based upon case study method. It is the method of study in depth rather than breadth. In this approach performance of the enterprise before disinvestment is compared with its performance after disinvestment, attributing any observed change to the disinvestment. For the purpose of the present study Pre- disinvestment mean value is compared with their Post disinvestment Mean value .

COLLECTION OF THE DATA:Study is totally based on secondary data.

Secondary Data Magzines Internet Newspaper Annual reports of GAIL.

SAMPLE SIZE:5 Years after disinvestment.

REFERENCE:Bibliography: Disinvestment of Indias Public Sector Units:- By Bhole, L.M. Disinvestment and corporate performance :-by Chandawat, D.S., Bhanawat, Shurveer S.and Mehta, Ranu Disinvestment in India:- By Naib Sudhir PUBLIC SECTOR PERFORMANCE SINCE 1950, A Fresh Look:- By Nagaraj, R. Disinvestment in India, I lose and You gain:-by Baijal,Pradeep Strategies of Disinvestment-Drawbacks & Evaluation:-by Kiran, Kranthi

Webiography:WWW.CMIE.Com WWW.indianfoline.Com WWW.DIVEST.NIC.IN WWW.BUSINESS-STANDARD.COM

10