Disinvestment of PSUs:Leaving money on the table

Abstract

The Securities and Exchange Board of India (SEBI) takeover regulations state that bidders acquiring control of a public limited company are mandated to make a public offer for an additional 20 per cent of the outstanding shares at a predetermined (offer) price. We show that the takeover guidelines could cause a transfer of wealth from the majority shareholders to the minority shareholders. As a result, lower proceeds (than otherwise) are raised in disinvestments involving strategic sale of PSUs with a public float. The magnitude of this problem is discussed by analysing TCS's acquisition of CMC in 2001. Further, we also present a framework that can be used to mitigate the wealth transfer. In the TCS acquisition of CMC, we show that a simple implementation of the framework could have raised the proceeds by as much as 6 per cent, and possibly more.