The various methodologies are:
CAPITAL
MARKETS
a)
Offer for sale to public at a fixed price
b)
Offer for sale to public through book building
c)
Secondary market operations
d)
International offering
e)
Private placement
f)
Auction
· Dutch auction
· French auction
STRATEGIC
SALE
WAREHOUSING
REDUCTION
IN EQUITY
a)
Buy-back of equity
b)
Conversion of equity into debt exchangeable into capital market
instruments
TRADE
SALE
ASSET
SALE / WINDING UP
MANAGEMENT
/ EMPLOYEE BUY OUTS (M/EBOS)
CROSS
SALES
SALES
THROUGH DEMERGER / SPINNING OFF
CAPITAL MARKETS -
Offer For Sale To Public At Fixed Price
Pricing:
Decided before the transaction; at a discount to market to ensure success
and immediate capital appreciation for
investors
Target investor set: Mix of retail and wholesale, with some reservation
for small investors
Transaction costs: High, in the range of 4-5% depending on issue size
Time involved: 3 -4 months
Regulation: SEBI guidelines, Stock Exchange requirements
Suitability:
- Companies for which small investor interest is expected to be substantial
- Profit making companies with good future prospects
- Companies not in need of significant technical, managerial and marketing
inputs
Precedents: Offer of 1 million shares of VSNL @ 750 per share.
Methodology: Offer for sale
- An issue of Equity Shares held by GoI to the public at large at a
pre-determined price
- Through an Offer Document
- Equity Shares can be accompanied by sweeteners such as warrants
- Issue amount is thus automatically obtained (No. of securities X price)
- Issue underwritten by the Syndicate Members (may or may not be)
- Offer made through an Offer Document
Advantages
- Ensures widespread shareholding
- Sets valuation benchmarks for further fund raising/ offer for sale
- Relatively quick method
- Transparent method
Disadvantages
- Dependent on capital market conditions
- Price at a discount to market/ intrinsic price to ensure good response
- Process expensive -cost app. 4- 5%
- Regulatory compliances : SEBI and Stock Exchanges
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Offer For Sale To Public Through Book Building
Pricing: Optimised, since price is discovered through a bidding process
Target investor set: Essentially wholesale, with minimum 25% retail
(10 applicants, per lakh of capital issued)
Transaction costs: High, in the range of 5 -6% depending on issue size
Time involved: 2-3 months · Regulation: SEBI guidelines, Stock Exchange
requirements
Suitability:
-
Companies for which institutional interest is expected to be substantial
- Profit making companies with good intrinsic value and future prospects
- Companies not in need of significant technical, managerial, marketing
inputs etc.
Precedents: none among PSEs -Hughes Software Ltd. and HCL Technologies
Ltd. in the private sector
Methodology: Offer for sale
- Issue of Equity Shares held by GoI to the public at large
- Number of securities to be pre-determined and disclosed
- Price discovery through bidding by interested investors -85% (institutional
and retail) and allocations made at cut-off
price (Dutch Auction) followed by a fixed price offer -cut-off price
of 15% to retail investors - Issue amount
is thus automatically obtained (No. of securities X price)
- Issue underwritten by the Syndicate Members (may or may not be)
- Offer made through an Offer Document
Advantages
- Optimises price
- Ensures widespread shareholding
- Sets valuation benchmarks for further fund raising / offer
for sale for IPOs
-
Relatively quick method - Transparent method
Disadvantages
-
Expensive - with cost of 5-6%
-
Regulatory compliances - SEBI & Stock Exchange
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Secondary Market Operations
Pricing: at market prices
Target investor set: Essentially wholesale
Transaction costs: Low, in terms of brokerage
Time involved: spot transactions
Regulation: Stock Exchange requirements
Suitability:
-
Companies which have a sizeable floating stock with good intrinsic value
and good future prospects
-
Companies not in need of significant technical, managerial, marketing
inputs etc.
Precedents: none
Methodology: sale through market operations
-
A secondary market sale of Equity Shares held by GoI
- Through brokers
-
To interested buyers - institutional and retail
-
At trading market prices
Advantages
- Low costs - only brokerage to be paid
Disadvantages
- Unsuitable for Companies with low floating stock
-
interest may be low
-
Price dependent on day to day market conditions
-
Amount of proceeds uncertain - Possibility of price rigging
-
Highly dependent on the day-to-day demand for the shares.
-
Method may not be considered transparent
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International Offering
Pricing: valuation by international Qualified Institutional Buyers (QIBs)
(through book building) and related to domestic
market prices
Target investor set: Essentially foreign institutional investors
Transaction costs: High, in the range of 4-5% depending on issue size
Time involved: 3-4 months
Regulation: Disclosure requirements by Securities Exchange Commission
(SEC) and accounting in accordance with US
Generally Accepted Accounting Practices (GAAP) for ADRs), NASDAQ/ NYSE/
LSE listing requirements
Suitability
- Companies which have stocks listed in the international
markets or companies with actively traded stock in
domestic markets
- Companies with good intrinsic value, good future prospects and of
international repute
Precedents: VSNL, MTNL, GAIL
Methodology: offer for sale in the international markets
-
An offer to international investors through issue of Depository Receipts,
which represent underlying shares (ADRs
in the USA market and GDRs in markets other than the USA)
-
Recasting of accounts as per GAAP for issue of ADRs and consolidation
of accounts for issue of GDRs
-
Preparation of red herring (Offer Document) and road shows
- Price discovery through bidding and allocations made
at cut-off price (Dutch Auction) or at bid price (French Auction)
-
The issue is fully underwritten
-
Offer through an offering document
Advantages
-
Access to deeper international markets and capital, sometimes at better
price
-
Creates price tension between the overseas and home market
-
Enhances visibility
Disadvantages
- Time consuming process
- Stringent regulatory
requirements
-
accounting norms and disclosures and regular reporting to SEC in case
of ADRs
-
Cost of 4-5% for ADRs and about 3% for GDRs
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Private Placement of Equity
Pricing: valuation by merchant banker and feedback from institutional
investors or price discovered through book building.
Target investor set: Essentially institutional including multilateral
agencies, private equity funds
Transaction costs: low
Time involved: 1-2 months
Regulation: Foreign investment guidelines in case of overseas investors
Suitability:
-
Unlisted companies
-
Listed companies with low floating stock and low volumes
-
Companies with good intrinsic value and good future prospects
Precedents: CONCOR, GAIL (Domestic issue with FIIs participation)
Methodology: placement of equity
-
To a set of institutional investors
-
At a negotiated price arrived at through valuation or price discovery
through book building
-
With issues of management rights and exit option resolved
-
Through an information memorandum circulated among institutional investors
and due-diligence
-
In case of listed companies, placement of less than 15% equity to each
investor to avoid trigger of Take-over code
Advantages
-
Less time consuming
-
no regulatory compliance requirements, except in case of foreign investment
-
Low transaction cost
Disadvantages
- Does not ensure widespread shareholding
-
May not be considered transparent
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Auction
Pricing: optimised through bidding. In case of Dutch Auction, allotments
made at single price. In case of French Auction, allotments
made at bid price
Target investor set: Essentially institutional
Transaction costs: Low
Time involved: 1-2 months
Regulation: SEBI Take-over code
Suitability:
-
Companies with good intrinsic value
Unlisted companies
Listed companies with low floating stock
-
French Auction
-
Low floating stock/ low trading volumes vis-à-vis number of shares on
offer
Precedents: Initial 9 rounds of disinvestment
Methodology: Auction through the Dutch/French Auction
-
To a set of institutional investors
-
At a price discovered through the bidding process
-
For a pre-determined number of Equity Shares
-
Allocations made
At a cut-off price to all investors above the cut-off price in case
of Dutch Auction
At the bid price in case of French Auction - Marketing through Analysts'
meet and one-on-one discussions
- In case of listed companies, placement of less than 15% equity to
each investor to avoid trigger to Take-over code
Advantages
-
Optimises receipts to the GoI (amount higher in case of French Auction)
-
Transparent mechanism
-
Less time consuming with no regulatory compliance requirements
-
Low transaction cost
Disadvantages
-
Does not ensure widespread shareholding
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STRATEGIC SALE
Pricing: Optimisation through competitive tension and control premium
Target investor set: Investors with strategic fit - techno-commercial
credentials
Transaction costs: Low
Time involved: 6-10 months
Regulation: Companies Act, SEBI Take-over code, Stock Exchange, RBI
Suitability:
-
Companies in the non-core sector
-
Companies where GoI is willing to give significant management control
Precedents: MFIL, BALCO, CCI (Yerraguntla unit), Vikrant Tyres, OPGC
etc.
Methodology:
- Structuring the transaction in terms of
Extent of stake to be divested
Extent of management rights
-
Decisions on pre qualification criteria, bid evaluation criteria and
bidding process
-
Preparation and circulation of information memorandum to pre-qualified
buyers
-
Due diligence and bidding
-
Evaluation of bids and negotiations
-
Signing of Sale Agreement
Advantages
-
Maximises price because of control premium
-
Brings technical/marketing/financial/managerial expertise of the buyer
to the company
-
Increased value of residual GoI shareholding
-
Low cost and less regulation
Disadvantages
-
Time consuming
-
Issues related to management, labour etc. to be resolved
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WAREHOUSING
Pricing: Market determined price, after building in returns to the warehouser.
Profit on sale, net of selling expenses, by warehouser
shared in pre-determined ratio
Target investor set: Essentially institutional
Transaction costs: Fixed return to warehouser less cost of funds for
GoI
Time involved: within 1 month
Regulation: RBI restrictions on bank investments
Suitability:
-
Listed companies with adequate liquidity
- Potential for growth
in market prices
Precedents: None
-
Who will buy shares from the GoI
-
At a discount to the market price
-
To sell the shares at a later date in the market, within a specified
time frame
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REDUCTION IN EQUITY :
Buy Back Of Shares
Pricing: In accordance with SEBI Buyback regulations
Target investor set: Shares bought back by the company
Transaction: Companies Act, SEBI Buyback regulations
Suitability:
- Cash rich companies with no immediate capex plans
-
Low geared companies with good intrinsic value, which is not reflected
in accretion to shareholder value and
market price
Precedents: None in Public sector, Indian Rayon, Reliance Industries
Limited in private sector
Methodology: Offer by company to buy-back its shares from GoI
- Through tender route
Buy-back at fixed price
In case of over subscription, acceptance on proportionate basis
- Through book building
Buy-back through Dutch Auction route- price discovery through bidding
by interested investors- and allocations made at
cut-off-price
-
Valuation to factor in future loss of dividend to GoI
Advantages
- Reduces capital and thus improves EPS, Book Value & RoE of the Company
post buy-back
-
Low cost transaction
-
Relatively quick method
Disadvantages
- Regulatory requirements
-
Post buy-back debt equity ratio not to exceed 2: 1
- Maximum number of Equity Shares to be bought back should not
exceed 25% of the existing paid-up capital
-
The maximum amount that can be expended on a buy-back should not exceed
25% of the Company's
paid
- up
capital and free reserves
Reduces
cash surplus with the company.
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Conversion Of Equity Into Another Instrument
Pricing: Book value/market price based
Target investor set: Wholesale
Transaction costs: Low - Placement costs
Time involved: Up to 3 months
Regulation: Companies Act
Suitability:
-
Cash rich companies with no immediate capex plans
-
Low geared companies with good intrinsic value which is not reflected
in accretion to shareholder value and market
price
Precedents: NALCO
Methodology: - Conversion of equity into an attractive and suitable
capital market instrument plain vanilla bonds, deep
discount bonds, fully/partially convertible bonds, bonds with warrants
attached, preference shares with/without warrants
- Preparation and circulation of an information memorandum (IM) among
institutional investors
-
Placement of the instrument
Advantages
- Results in improvement in the capital structure of the Company combined
with funds inflow for GoI
-
Reduces capital & thus improves EPS, Book Value & RoE of the Company
-
Low cost of transaction
-
Relatively quick method
-
No reduction in cash surplus with the Company
Disadvantages
- More regulatory compliance requirements for listed companies
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TRADE SALE
Trade
Sale means sale of a business or a division or a non-core activity .
In addition to price, the auction to take into account factors such
as capital investment to which the bidder is willing to commit and guarantees
the bidder makes to employees and customers.
Though the total amount offered is an important factor in the auction,
there is also a trade-off for the Government between
(1) obtaining the maximum amount of sale proceeds and
(2) ensuring that charges to the customers remain at affordable prices.
For this reason, the Government generally develops a number of selection
criteria e.g.
- Indicative bids
- Strengths and capabilities of prospective operators
- Financial strength and credentials of bidders
-
Any special conditions/assumptions attached to the bids such as spelling
out in advance the extent to which
rate increase will be permitted
over a transition period.
A Trade Sale is generally regarded as a quicker option to execute. Public
offerings make more sense when the company to be sold has a reasonable
strong skill base and capital markets are liquid. In UK, Trade Sales
have generally been used with smaller industries or enterprises.
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ASSET SALE AND WINDING UP
This is normally
resorted to in companies, which are either sick or facing closure. The
Asset Sale is normally done either by open auction or by tender method.
Sick companies under SICA are wound up by BIFR and handed over to the
official liquidator for realisation of dues through liquidation.
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MANAGEMENT/EMPLOYEES
BUYOUT (M/EBO)
For smaller companies,
particularly those that are highly dependent on their personnel, management/employee
buyouts have been found to be suitable privatisation techniques. Although
most buyouts are led by management, active participation by the workforce
is a pre-requisite for success. The workforce is to be necessarily brought
along, contributing some of their own money towards the enterprise.
London's Bus service was reorganized into companies, which were purchased
by their managers and employees. National Freight Corporation of UK
is the classic case of 100% employee buyout.
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CROSS SALE
Strictly speaking
this is not an option for privatisation. However, Governments seeking
to sell enterprises via Trade Sales should decide at the outset what
their policy would be with regard to bids from Government owned enterprises
and spell out such policies in their initial request for qualifications
from potential bidders.
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SALE THROUGH DEMERGER/SPINNING OFF
Sections
391-394 of the Companies Act 1956 govern demerger The basic concept
of demerger requires transfer of an undertaking from an existing company
("Transferor Company") to another existing company (Transferee Company").The
demerged companies have a shadow shareholding as that of the Transferor
Company. The scheme of demerger has to be approved by Department of
Company Affairs. To cut down the delay, new transferee companies can
be incorporated as shell companies in which the properties of transferor
company can be hived off i.e. demerged. Such new companies remain as
"shell" companies until the properties are transferred to them as per
the order of DCA. These new companies are government companies under
S.617 of the Companies Act and are formed only for the limited purpose
of facilitating the demerger on transfer of shares to successful bidders,
these companies cease to be government companies.
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