Disinvestment
The direct or indirect sale by the Central Government, a State Government or a government company of shares, voting rights or control in a public sector undertaking.
In plain language
When the government reduces its stake in a company it owns, the transaction has a name of its own: disinvestment. Sometimes it is a partial sale of shares to the public while the government keeps control; sometimes it is a strategic sale in which a private buyer acquires control.
For a merchant banker the mechanics look familiar — a prospectus offer, an offer for sale through the stock exchange, or a negotiated sale to a bidder — but the seller is the State. That brings in a government department (DIPAM), government performance guidelines (DPE), and several special carve-outs in SEBI's own regulations.
How it works
Definition (Chapter 8). The direct or indirect sale by the Central Government or any State Government or by a government company, as the case may be, of shares or voting rights in, or control over, a target company which is a public sector undertaking.
Two types.
- An offer for sale by the selling shareholder (the Government of India) through a prospectus — sometimes combined with a fresh issue — or an offer for sale through the stock exchange mechanism;
- A strategic sale directly to a successful bidder.
Who runs it. The Central Government department concerned is the Department of Investment and Public Asset Management (DIPAM) within the Ministry of Finance. A merchant banker may advise on the bidding process, valuation and bid pricing, conduct the bid process or the market transaction, or advise on a strategic sale. Advisory mandates for government entities (a bonus issue, a buy-back) must also keep the Department of Public Enterprises (DPE) guidelines in mind.
The DPE composite score. A PSU's performance over the last three years is scored on six indicators:
| Parameter | Weightage |
|---|---|
| Net profit to net worth | 25 |
| Manpower cost to total cost of production or services | 15 |
| PBDIT to capital employed | 15 |
| PBIT to turnover | 15 |
| Earnings per share | 10 |
| Inter-sectoral performance | 20 |
| Total | 100 |
EPS (face value Rs 10) is scored on a scale: 30 or more → 10; 20 to under 30 → 8; 10 to under 20 → 6; 5 to under 10 → 4; 0 to under 5 → 2; and two lower bands for negative EPS scoring 0 and −2.
Carve-outs elsewhere in the workbook.
| Rule | Special treatment | Chapter |
|---|---|---|
| SAST public announcement | Made the same day the disinvestment agreement is executed | 7 |
| SAST offer price | The 60-trading-day VWAP parameter does not apply to disinvestment of a PSU, where there is a change in control | 7 |
| SAST staged acquisitions | Acquisitions at subsequent stages under the disinvestment agreement are exempt, if buyer and seller are the same at every stage and all stages were disclosed | 2, 7 |
| Competing offers | None may be announced until the offer period expires | 7 |
| IPO offer for sale | The one-year holding requirement does not apply to a government company, statutory authority or SPV in the infrastructure sector | 5 |
| Promoters' contribution | Below-IPO-price acquisitions in the past year remain eligible for such government infrastructure issuers | 6 |
| Minimum public shareholding | Rule 19A's 25% applies to listed companies other than public sector companies | 2 |
| FPIs | May bid in a government disinvestment offer without routing through a stock broker | 2 |
A worked example
Illustrative figures. The Government of India agrees to sell 26% of a listed PSU with 100 crore shares to a strategic buyer at Rs 90, with management control.
Strategic sale = 26 crore shares × Rs 90 = Rs 2,340 crore
Because control changes, the buyer must make an open offer to the public.
Timing. The public announcement is made on the same day the disinvestment agreement is executed.
Offer size and price. At least 26% — another 26 crore shares. In a private-sector deal, one of the floor parameters would be the 60-trading-day VWAP; in a PSU disinvestment with change of control, that parameter is set aside, so the negotiated Rs 90 and the other parameters drive the floor. Assume the offer is at Rs 90:
Consideration = 26 crore × Rs 90 = Rs 2,340 crore
Escrow = 25% × Rs 500 crore + 10% × Rs 1,840 crore
= Rs 125 crore + Rs 184 crore = Rs 309 crore
No rival bidder. A private group that wants to counter-bid is shut out: in a disinvestment open offer, no competing public announcement may be made until the offer period expires.
A second tranche. The agreement provides for the buyer to acquire a further 10% from the government in year two. Disclosed upfront, with the same buyer and seller, that later stage is exempt from a fresh open offer.
Why NISM asks about it
Chapter 8 (Other Merchant Banking Activities – Disinvestment, Buyback of Equity Shares), 10% of the paper, opens with disinvestment; Chapter 7 carries its takeover carve-outs.
Chapter 8's review question 4 — "Department of Economic Affairs handles all matters related to the disinvestment of Government of India shareholding in Central Public Sector Enterprises" — is False: the workbook names DIPAM within the Ministry of Finance. Expect the DPE weightage table too (the 25 for net profit to net worth, the 20 for inter-sectoral performance).
Common exam traps
- DIPAM, not the Department of Economic Affairs and not DPE. DPE issues the performance guidelines; DIPAM handles disinvestment.
- The target must be a public sector undertaking, and the seller the Central or a State Government or a government company.
- An OFS through the stock exchange mechanism is still disinvestment when the government sells.
- No competing offers in a disinvestment open offer until the offer period expires.
- The 60-trading-day VWAP carve-out applies only where there is a change in control of the PSU.
- The workbook's lettering is inconsistent here. In the direct-acquisition price list the 60-trading-day VWAP is clause (d) and the PSU proviso refers to clause (d); in the indirect-acquisition list the same VWAP is clause (e), but the proviso still says clause (d), which in that list is the highest price paid between contract and announcement. Read the proviso as applying to the market-price VWAP parameter, and expect the examiner to follow the direct-acquisition list.
- The DPE EPS scale prints its two negative bands ambiguously (">= 5 &<0" and ">= 10 &-5"); the scores for them are 0 and −2.
Check yourself
1.The Department of Economic Affairs handles all matters relating to disinvestment of Government of India shareholding in Central Public Sector Enterprises. True or false?
- a)False — the concerned department is the Department of Investment and Public Asset Management (DIPAM) within the Ministry of Finance
- b)True
- c)False — it is handled by the Department of Public Enterprises
- d)False — it is handled by SEBI
Show the answer
Answer: (a) False — the concerned department is the Department of Investment and Public Asset Management (DIPAM) within the Ministry of Finance
The concerned department for this activity in the Central Government is the Department of Investment and Public Asset Management (DIPAM) within the Ministry of Finance.
Option C names a different body with a different function. The Department of Public Enterprises (DPE) issues guidelines to be observed in advisory work: if a Merchant Banker has been mandated to provide advisory services to any Government entity then DPE guidelines issued by the Department of Public Enterprises, have to be kept in mind.
DIPAM runs disinvestment; DPE sets guidelines for advising public enterprises.
What disinvestment is: the direct or indirect sale by the Central Government or any State Government or by a government company, as the case may be, of shares or voting rights in, or control over, a target company, which is a public sector undertaking.
Two types: (1) An offer for sale by the selling shareholder (in this case the Government of India) through the prospectus- at times this could be a combination of a fresh issue and an offer for sale; or Offer for Sale through the Stock Exchange Mechanism; or (2) Strategic sale directly to a successful bidder.
The merchant banker's work looks familiar: the role of a Merchant Banker in Disinvestment transactions is similar to the transactions of any IPO / FPO / OFS (SE) or a strategic sale in the private sector — covering advice with regard to bidding process, valuation and bid pricing, conducting the bid process or the proposed market transaction such as an OFS as per SEBI Regulations or a strategic sale to an identified third party.
The DPE guidelines include a performance measure. In order to review the performance of the PSU, a composite score based on its performance for the last three years would be calculated, using 6 performance indicators weighted Net Profit to Net Worth 25 · Manpower Cost to total Cost of Production or Cost of Services 15 · PBDIT to Capital employed 15 · PBIT to Turnover 15 · Earnings Per Share 10 · Inter Sectoral Performance 20.
Note that disinvestment also appears in the SAST rules from Chapter 7 — the 60-day market price parameter shall not apply in the case of disinvestment of a public sector undertaking, and no competing offer is permitted where the open offer is for acquisition of shares pursuant to disinvestment.
2.According to the workbook, disinvestment transactions are generally of which two types?
- a)A buy-back by the PSU and a bonus issue to the Government
- b)An offer for sale by the Government through a prospectus (sometimes combined with a fresh issue) or through the stock exchange mechanism; and a strategic sale directly to a successful bidder
- c)A rights issue to existing shareholders and a preferential allotment to the Government
- d)A delisting offer and a scheme of amalgamation
Show the answer
Answer: (b) An offer for sale by the Government through a prospectus (sometimes combined with a fresh issue) or through the stock exchange mechanism; and a strategic sale directly to a successful bidder
OFS or strategic sale. The workbook: disinvestment transactions are generally of two types: (1) An offer for sale by the selling shareholder (in this case the Government of India) through the prospectus- at times this could be a combination of a fresh issue and an offer for sale; or Offer for Sale through the Stock Exchange Mechanism; or (2) Strategic sale directly to a successful bidder.
Disinvestment itself means the direct or indirect sale by the Central Government or any State Government or by a government company... of shares or voting rights in, or control over, a target company, which is a public sector undertaking.
- Buy-back / bonus — these appear as advisory transactions for a government entity, not as disinvestment types.
- Rights / preferential and delisting / amalgamation — not in the workbook's classification.
3.Which parameter carries the highest weightage in the DPE composite score for reviewing a PSU's performance?
- a)Net Profit to Net Worth, at 25
- b)Earnings Per Share, at 25
- c)Inter Sectoral Performance, at 25
- d)PBIT to Turnover, at 25
Show the answer
Answer: (a) Net Profit to Net Worth, at 25
The six indicators and their weightages:
Net Profit to Net Worth — 25 Manpower Cost to total Cost of Production or Cost of Services — 15 PBDIT to Capital employed — 15 PBIT to Turnover — 15 Earnings Per Share — 10 Inter Sectoral Performance — 20 TOTAL — 100
Net Profit to Net Worth is highest at 25; Inter Sectoral Performance second at 20; Earnings Per Share lowest at 10.
So option C names the right parameter as second, not first, and option B badly overstates EPS.
The score covers three years: in order to review the performance of the PSU, a composite score based on its performance for the last three years would be calculated.
And the indicators were chosen for breadth: the performance indicators have been chosen so as to capture the performance of PSUs irrespective of their belonging to manufacturing sector or services sector.
EPS is itself scored on a band (face value Rs. 10): >=30 scores 10; >=20 & <30 scores 8; >=10 & <20 scores 6; >=5 & <10 scores 4; >=0 & <5 scores 2; a small negative scores 0; and a larger negative scores −2.
So the maximum EPS contribution is 10 out of 100 — consistent with its weightage.
Where this applies: there are certain guidelines issued by the Department of Public Enterprises (DPE), to be kept in mind where a Merchant Banker has been mandated to provide advisory services to any Government entity.
And the advisory work itself is ordinary merchant banking: apart from strategic disinvestments, advisory transactions for a Government entity could be for a bonus issue or a buy-back or any other advisory transaction. In such cases also, the role of a Merchant Banker is similar to the transactions of advisory nature for any entity in the private sector.
Where this is taught
Free preparation for NISM Series IXRelated terms
- Competing offerAn open offer made by another person within 15 working days of the first acquirer's detailed public statement, for at least as many shares as the first acquirer would end up holding.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Escrow accountThe security an acquirer must deposit before a takeover open offer — 25% of the first Rs 500 crore of consideration plus 10% of the balance — so that the money to pay tendering shareholders is ring-fenced.
- Offer periodUnder the SAST Regulations, the period from the agreement or public announcement that triggers an open offer until consideration is paid to accepting shareholders, or the offer is withdrawn.
- Promoters' contributionThe minimum stake promoters must hold and lock in at a public issue — in an IPO not less than 20% of post-issue capital, locked in for 18 months (three years if most proceeds fund capital expenditure).
- TakeoverThe acquisition of substantial shares or voting rights in a company for the purpose of seeking management control — regulated for listed companies by the SEBI (SAST) Regulations, 2011.