Maruti Udyog Ltd. (MUL) 1. On 14th May 2002, the Government approved disinvestment in Maruti Udyog Ltd.

through a two-stage process: A rights issue of Rs. 400 crore by MUL in the first phase with the Government renouncing its rights shares to Suzuki. Suzuki would gain majority control and pay Rs. 1,000 crore to the Government as control premium. Sale of its existing shares through a public issue in the second phase; the issue to be underwritten by Suzuki. Highlights of the Agreement reached 2. The highlights of the agreement reached between the Negotiating Teams of the GOI and Suzuki are summarised below: The total value of the rights issue would be Rs. 400 crore The rights issue price would be Rs. 3,280 per share. Thus, the rights issue would be for a total of 12,19,512 shares of Rs. 100 each The fair value for the purpose of working out renunciation premium would be the average of the 3 values indicated above, i.e., Rs. 3,280 per share GOI will renounce the whole of its rights share of 6,06,585 shares and Suzuki will subscribe to the whole of the rights shares so renounced by GOI at the fair market value Suzuki would, through this method and those spelt out below, enhance the value of MUL and Suzuki will pay a control premium of Rs.1,000 crore to GOI, without GOI parting with even a single of its shares in MUL Suzuki and GOI have agreed to enter into a Revised Joint Venture Agreement (JVA). The Revised JVA shall constitute the entire agreement between GOI, Suzuki and MUL with respect to the subject matter of the Revised JVA and any prior understanding and agreements between the Parties with respect to such subject matter shall be superseded Suitable amendments in the Memorandum and Articles of Association of MUL would be carried out to bring them in line with the decisions recorded above and also to enable the listing of MUL shares on the stock exchange The Revised JVA envisages that GOI would sell its existing shares in the domestic market with participation of Indian and Global investors as permitted by law after the completion of the rights issue transaction Suzuki has agreed to underwrite the first public issue of approximately 36 lakh shares held by GOI at a price of Rs. 2,300 per share. For the balance shares, GOI has a put option at a discount of 15% and/or 10% of average market price. GOI always has a put option up to 30th April 2004 at the book value now (Rs. 2,000) or then, whichever is higher

3. Since the rights issue will be of a size of 12,19,512 shares, the relative shareholding of Suzuki and GOI after completion of the rights issue would be 54.20% and 45.54% respectively. 4. The price per share that emerges now is Rs. 3,684, which should be compared to the value per share that would be arrived at if the formula agreed to between Suzuki and GOI in the 1992 agreement were to be used. Using that formula the price per share works out to Rs. 1,153 based on the provisional figures for the latest year i.e., 2001-02. Achieved in Constraints 5. Because of the earlier agreement, GOIs negotiating position has all along been highly disadvantageous because of the following constraints: The clause in the existing agreement that SUZUKIs consent is required for GOI to transfer its share In the earlier transactions with SUZUKI in 1982 and 1992, when Suzukis shareholding was allowed to be increased (vis-a-vis GOI), first from 26% to 40% and then from 40% to 50%, no control premium had been paid by Suzuki, though control had passed to them. As a matter of fact, the Government received no payment at this stage as shareholding was allowed to be increased by issuance of new shares to MUL. Exit options were also not built in The pricing formula in 1992 also yielded a low price per share of Rs. 269 at which the transaction was done Using the same formula of 1992 now, the price per share would be Rs.1,153 as stated above. As against this, the current transaction would be at a minimum of Rs. 3,684 assuming undertaking at Rs. 2,300 If we examine the rights issue alone, the new shares are being allotted to Suzuki at Rs. 3,280 against Rs. 269 in the last transaction(equivalent value Rs.1153). Also, against nil control premium last time, the GOI is being paid Rs. 1,000 crore as control premium Suzuki already has 50% control in the company and GOI in a minority position at 49.74% An atmosphere of distrust between the two sides, due to the previous arbitration case being contested by both sides during 1997 6. Suzukis initial offer was of Rs. 170 crore as control premium, which was increased to Rs. 286 crore after considerable negotiations. Thereafter, it took the negotiating team over a month to negotiate a sum of Rs. 1,000 crore presently offered by Suzuki.

7. Similarly, initially Suzuki was totally reluctant to incorporate any underwriting of the public issue by GOI shares. SUZUKI has now agreed to underwrite the public issue of the 36,12,169 existing shares at Rs. 2,300 per share and the balance 29,68,012 at a minimum of the present book value of about Rs. 2,000 per share. Once MUL is listed, and when GOI goes for a public issue with full backing of Suzuki, the share prices are likely to be above the book value. This would mean higher receipts to GOI. Analysis of the Deal 8. The MUL disinvestment is unique in nature as compared to the other strategic sale transactions completed so far such as VSNL, BALCO, HZL, CMC, etc. Therefore, this transaction would have to be judged using different methods as discussed below. 9. Comparison with other disinvestment cases: Since MUL is not a listed company, both sides had agreed to determine the fair value of MUL shares through valuation by three independent valuers. This average value worked out to Rs. 3,280 per share. Therefore, the value of Governments existing 65,80,181 shares works out to approximately Rs. 2,158 crore based on this fair value. What Government is receiving from Suzuki now is Rs. 1,000 crore as control premium and considering the undertaking at Rs. 2,300 per share for the 36 lakh shares and Rs. 2,000 per share for the balance approximately 29 lakh shares, it would be an additional amount of Rs. 1,424 crore for the existing shares. If the existing shares could be sold at more than the present book value, GOIs receipt would further go up. Thus, the GOI will, at a minimum, get out of the transaction of handing over the control and selling its existing shares forRs. 2,424 crore, which is Rs. 266 crore above the fair value of Rs. 2,158 crore mentioned above. If we compare this with similar figures of earlier transactions it would be seen that the present transaction is even better than what has been possible in them. 10.Suzuki already has 50% shares in MUL and control and management rights which were more than equal as per earlier agreements. This was due to their being technology suppliers. In other cases of disinvestment, the strategic partner does not have any control before acquiring GOI shares but acquires control only after the strategic sale. Thus, the control premium presently offered by Suzuki should be viewed in this background. 11.Annual Cash Inflows to the Government: Currently, GOI receives dividend on its shareholding. The dividend received by GOI in the past several years has been about Rs.13-20 crore per annum. In the year 2000-01, MUL did not declare any dividend. In case this transaction is completed, GOI would receive Rs.1,000 crore

upfront which would yield interest of Rs. 100 crore per annum at the conservative rate of 10%. Added to this would be the dividend on the existing shares, even if Government does not sell these shares. If it sells the shares then GOI would receive a minimum of Rs. 142 crore per annum (at the rate of 10%) on the balance receipt of Rs. 1,424 crore as indicated above. Thus, the minimum annual yield to GOI would be Rs. 242 crore against the present dividend level of Rs. 13-20 crore per annum. 12.Value enhancement by Suzuki: The Revised JVA incorporates commitment by Suzuki that: Suzuki will endeavour to make MUL the source for some of its models globally. Suzuki will assist MUL to access new export markets. Suzuki will give discount on certain components as previously agreed to by it. Suzuki will set up a task force to explore the possibilities of further reduction incosts at MUL. Suzuki will promote MUL and its products in the global market. Suzuki will aggressively strengthen MULs manufacturing and technical capabilities so as to make MULs products internationally competitive in terms of quality and cost. In case the withdrawal of GOI results in Suzuki undertaking the above activities, the beneficiary would not only be Suzuki but also the Indian automobile sector. MUL today contributes nearly Rs. 2,500 crore to the national exchequer annually. Also, higher growth and earnings of MUL would result in higher receipts to GOI through taxes from MUL. Further, all the above measures by Suzuki would enhance the value of MUL and hence ensure the possibility of much higher receipts than the minimum estimated above. 13.Price Multiple Ratio Analysis: One other way to look at the transaction would be to test the P/E in this case with the P/E of earlier disinvestments. The P/E in earlier cases have been 37 (HTL), 63 (IBP), 11 (VSNL), 19 (Balco), 12 (CMC) and 26 (HZL). In case we take the conservative scenario discussed above, GOI receives Rs. 2,424 crore for 49.74% holding which means an equity value of Rs. 4,873 crore for MUL as a whole. The profit earned by MUL in 2001-02 was Rs. 55 crore. This gives a P/E ratio of about 89, which compares very well with P/E of the earlier disinvestments. 14.Comparable Companies: Taking the conservative scenario discussed above, the per share value works out to about Rs. 3,684, which is far above the present Book Value of about Rs. 2,000 per share, resulting in price to book value ratio of 1.8. Also, it is higher than the valuation made by the three valuers. This is relevant as

most automobile sector companies are currently trading at less than even their book values. Background to Negotiations 15.MUL, India s dominant automobile manufacturer, is a joint venture of Government of India (GOI) and Suzuki Motor Corporation (SUZUKI). As on year ended March 31, 2001, MUL had an equity capital of 132.30 crore and a net worth of Rs. 2,642 crore. With the advent of competition, Marutis profitability has been under pressure. 16.As per the existing joint venture agreement, both GOI and SUZUKI had joint control over the management of MUL and took turns in appointing the Chairman and Managing Director of the company. In addition, the joint venture agreement restrained the GOI from selling the shares of MUL to a third party without the consent of SUZUKI. 17.The Government had decided in February 2001 on disinvestment in MUL through the option of MUL offering shares on a rights basis to existing shareholders with a renunciation option. Government constituted a Negotiating Team to negotiate on behalf of the Government with SUZUKI. The Team comprised of Secretary, Ministry of Disinvestment; Secretary, Department of Heavy Industry and Shri K.V. Kamath, Managing Director and CEO, ICICI Ltd. The Committee was asked to negotiate and finalise the modalities of disinvestment with SUZUKI. Meetings with SUZUKI 18.The first round of meetings was held between the Negotiating Team of GOI and SUZUKI between 2nd March 2001 and 12th March 2001 at New Delhi . At the conclusion of the discussions, a record note of discussions was signed by both the parties on 13th March 2001. To summarise, both the sides had agreed that the roadmap for disinvestment of GOI shares in MUL would comprise of two phases rights issue in the first phase and, after the completion of the rights issue, sale of existing GOI shares in the market in the second phase. It was acknowledged that this road map would help in bringing in capital into MUL required for its expansion and growth and at the same time lead to increase in the value of MUL and its share price discovery through a transparent manner, which would help determine the benchmark for further disinvestment. 19.The value of the rights issue agreed upon was Rs.400 crore, which was arrived at primarily on the basis of the estimates of capex requirements in MUL. 20.Regarding valuation of Maruti shares, it was agreed that GOI and SUZUKI would jointly identify and appoint three reputed valuers to determine the value of shares

and the average of the three values accepted. 21.KPMG, Ernst & Young and S.B. Billimoria were appointed as Valuers and they submitted their valuation reports in January 2002, copies of which were also made available to SUZUKI. The fair value per share recommended by the three valuers are Rs. 3,200 by KPMG, Rs. 3,142.18 by Ernst & Young and Rs. 3,500 by S.B. Billimoria. The average of the valuations made by three different valuers works out to Rs.3,280. 22.After receipt of the valuation report, the second round of meetings was held between the Negotiating Teams of the GOI and SUZUKI between 12th February 2002 and 29th April 2002 at New Delhi to arrive at an agreement on the price at which the rights issue would be made, the portion of the GOIs rights share to be subscribed by SUZUKI, the renunciation premium and the control premium and modalities for the sale of existing shares held by GOI, etc. Discussions were also held to finalise the Revised Joint Venture Agreement. At the conclusion of the discussion, a record note of discussion was signed by both the parties. 23.Kotak Mahindra Capital Company Limited (KMCC) acted as the financial advisor to GOI. Dua & Associates were legal advisors to the Government. "In September 2005, the Government decided to disinvest 8% Equity (out of 18.28% Government of India Holding) to Indian Public Sector Banks. The Government sold 8% Equity (2,31,12,804 shares) for a consideration of Rs. 1,567.60 crore. The weighted average per share was Rs. 678.24. On 21st December 2006, the Cabinet Committee on Economic Affairs approved the disinvestment of residual 10.27% Government owned equity in Maruti Udyog Ltd. to the Public Sector Financial Institutions, Indian Public Sector Banks and Indian Mutual Funds. Expressions of Interest (EoIs) were received from 39 institutions/banks/mutual funds on 9th March 2007,. Out of the above 39 interested parties, 36 institutions/banks/mutual funds submitted the financial bids on 8 th May, 2007 On the basis of the differential auction method, 32 institutions/banks/mutual funds were allocated shares. The total realization to the Government from the sale of 10.27% stake in Maruti Udyog Limited would be Rs. 2366.94 crore at a weighted average price of Rs. 794.49 per share.

Bharat Aluminium Company Ltd (BALCO) BALCO is a fully integrated Aluminium-producing company, having its own captive mines, an alumina refinery, an Aluminium smelter, a captive power plant, and down-stream fabrication facilities. It was set up in 1965 and has its corporate office in New Delhi . Its main plant and facilities are situated in Korba, Chhatisgarh. It also has a fabrication unit in Bidhanbagh ( West Bengal ). The refining capacity of BALCO is 2 lakh tonnes per year and its smelting capacity is 1 lakh tonnes per year. Its employee strength was 6,436 on 2nd March 2001. The Government of India had 100% stake in BALCO prior to disinvestment. In 1997, the Disinvestment Commission classified BALCO as non-core for the purpose of disinvestment and recommended immediate disinvestment of 40% of the Government stake to a strategic partner, and a further reduction of the Government stake to 26% within 2 years of the strategic sale through a domestic public offering. It further recommended disinvestment of the entire remaining stake at an appropriate time thereafter. The Cabinet accepted the recommendations of the Disinvestment Commission for disinvestment of 40% stake through a strategic sale and further disinvestment through the capital market. Later, in 1998, the Disinvestment Commission revised its recommendation and advised the Government to consider 51% disinvestment in favour of a strategic buyer along with transfer of management, which was accepted by the Cabinet. The Government thereupon appointed M/s Jardine Fleming as advisor to assist in the sale of its 51% stake in BALCO to a strategic buyer. Simultaneously, it was brought to the attention of the Government that BALCO had a bloated equity of Rs. 489 crore and large unutilised free reserves of the level of Rs. 424 crore. It was suggested by the Ministry of Mines that BALCO's equity be reduced by 50% prior to disinvestment, by using its substantial cash surplus. This proposal was accepted. As a result, the Government received Rs. 244 crore from the capital restructuring of BALCO, and another Rs. 31 crore as tax on this amount, prior to disinvestment. The strategic sale process for BALCO started in late 1997, after the first decision of the Government, and finally came to end on 2nd March 2001. The 51% stake was sold to Sterlite Industries, the highest bidder, and fetched the Government Rs. 551.50 crore. The price received was higher than the values indicated by the various methods of valuation used. The Government thus recovered Rs 827.50

crore from this privatisation against approximately Rs. 10 crore as dividend it used to get against the 51% shares during the peak Aluminium cycle. Post sale, a number of doubts had been raised by various quarters on the disinvestment of BALCO, especially with regard to transparency, valuation and protection of employees interests. However, the entire sale process, including the appointment of advisor and the approval of the price bid, was carried out in an extremely transparent manner, in keeping with the highest standards of global practices. Of special mention are the clauses in the Shareholders Agreement with the strategic buyer, which offer adequate protection to employees of all levels with regard to their job safety and severance packages. Post-Privatisation Status of BALCO 1. The new management introduced VRS from 31st July 2001 to 16th August 2001. 981 applications (from 151 executives and 830 workers) were received. 694 old VRS applications were also pending. A total of 956 applications were accepted mostly where units were lying closed. 2. In spite of incurring losses to the tune of Rs. 200 crore due to the strike by the employees in 2001, an ex gratia payment of Rs. 5000 was made to all the employees. 3. Long-term wage agreement for a period of 5 years was entered on 7th October 2001 (wage revision was due since 1stApril 1999 and the earlier revision was for 10 years) as follows: a. b. Workmen get a guaranteed benefit at the rate of 20% of the basic pay Increase in allowances: Night shift allowance: Rs.10 - Rs.20/shift Canteen allowance: Rs. 400/month (instead of subsidised canteen facilities) Education allowance: Rs. 50 - Rs. 75/month Hostel allowance: Rs.150 - Rs.200 per month Scholarship amount to meritorious children doubled Leave Travel Assistance of around Rs. 6000 as cash every year Conveyance allowance: Scooter users Rs. 400 - Rs. 500/month, Moped users: Rs. 240 - Rs. 350/month, Other users - Rs. 150 - Rs. 260/month New practices introduced:

. a.

Job rotation Appraisal system

The new management proposed an investment of Rs. 6,000 crore which would increase production 4 times. Landmark Judgement in BALCO Disinvestment In protest of the BALCO disinvestment, the workers went on a 67-day strike. Three writ petitions-two in Delhi High Court and one in Chhatisgarh High Courtwere filed against disinvestment in BALCO in February 2001. The Supreme Court in its unanimous judgement delivered on 10th December 2001 validated disinvestment of BALCO by the Government of India. The landmark judgement also defined, amongst others, the parameters of judicial review in the Governments economic policy matters. The Honble Supreme Court, while validating BALCO-disinvestment, and dismissing the petitions, remarked, Thus, apart from the fact that the policy of disinvestment cannot be questioned as such, the facts herein show that fair, just and equitable procedure has been followed in carrying out this disinvestment. This judgement facilitated the path for other successful privatisations.