The disinvestment of public sector undertakings (PSUs) continues to spring new surprises. It also demonstrates that unless the disinvestment ministry is constantly on its toes, the battery of advisors, lawyers and investment bankers who counsel corporate India will constantly find new loopholes that allow buyers to sidestep key conditionalities written into the shareholders’ agreement between government and the seller.
The latest bombshell is the swift sale of Centaur Hotel near Mumbai’s domestic airport by Batra Hospitality (the winning bidder) to the Sahara group. The sale caught even Ram Naik and Arun Shourie on the wrong foot. Just as the two were getting ready for a face-off over a petrol pump attached to the hotel, the Batra group simply sold the hotel. In the process, it made a neat 35 per cent return in under four months by acquiring Centaur at Rs 83 crore and selling it for an estimated Rs 115 crore.
Why did the Sahara group not bid for the hotel directly? It cannot have paid Rs 32 crore extra for nothing when the synergies between the perfectly located hotel and its airline business should have been obvious during the bidding itself. It suggests that the hotel was either undervalued or the Sahara group paid a premium because the resale allows it to sidestep caveats in the shareholders’ agreement with the government. The disinvestment ministry has not commented on the deal, but it surely needs to rework its agreements or its valuation method.
In this context, the coal and mines minister, Uma Bharti, has a point when she says that the process should guard against hidden flaws and encourage further debate on certain aspects of disinvestment. Let’s look at some tricky issues that have surfaced in the recent past.
• Fudged account claims: The disinvestment ministry has found to its embarrassment that PSUs are as adept at cooking their books as the private sector and its ‘post closure’ clause in sale agreements is forcing it to cough up big chunks of money to make good previously undiscovered losses. Paradip Phosphates’ monthly losses were estimated at Rs 10-12 crore before divestment, but the real loss is allegedly around Rs 25 crore a month. Zuari Maroc Phosphates, which acquired a 74 per cent stake (at below the reserve price) in February, has reportedly claimed a sum that is almost equal to its bid price of Rs 151.70 crore as post-closure adjustment. This would mean that Zuari Maroc gets Paradip Phosphates virtually free.
• Similarly, a newspaper reports that HTL, {bought by Himachal Futuristic Communications (HFCL) for Rs 55 crore in October 2001}, which claimed a net profit of Rs 2.01 crore pre-disinvestment, was actually making a loss and HFCL has sought compensation for these losses. Are these justified? One cannot forget that HFCL itself is currently under investigation for ramping stock prices in collusion with Ketan Parekh and diversion of bank funds; it is also notorious for its Sukh Ram connections. Yet, it wasn’t barred from bidding and now has a claim against the ministry. Will the government pay up or will it be better for Mr Shourie to reverse these divestments and liquidate the companies?
• The defaulter issue: HTL and the divestment of Jessop India make it difficult to support the disinvestment ministry’s stand that it will not go into the background of bidders. Jessop was sold to Ruia Cotex, which owes money to IDBI. Similarly, Essar Shipping, which is in the race for Shipping Corporation of India, is facing recovery action by IndusInd Bank for failing to pay Rs 17.89 crore.
• The financing game: Bankrolling of PSU divestment could cause fresh problems if the ministry is not careful. This paper recently reported that disinvestment is seen as “the great big hope of corporate bankers”. It was estimated that the banking system hopes to provide around Rs 15,000 to Rs 20,000 crore to fund disinvestment. When banks fund disinvestment, the temptation to bid artificially high and strip the PSU after acquisition, so as to pay back bank borrowing, is very high. Moreover, weak nationalised banks are extremely capable of creating new bad loans by backing industrialists who do not intend to pay back, or are incapable of turning around PSUs.
Were this to happen, we would once again enrich industrialists by transferring money from one pocket of government to another. This is not a hypothetical scenario. The Tata attempt to divert Rs 1,200 crore from Videsh Sanchar Nigam Ltd’s reserves to a loss-making Tata Teleservices is an example. The second is Ajit Kerkar’s acquisition of the Centaur Hotel (at Juhu) in Mumbai, which was almost entirely funded by bank borrowing. Kerkar first had problems funding the acquisition and began to default almost immediately after. Can he turn around the hotel without access to finance for funding renovation? The disinvestment ministry should avoid such embarrassment by ensuring that only up to 50 per cent of the acquisition cost be funded by banks.
• The WTO angle: Former Disinvestment Commission chairman G V Ramakrishna tells me that strategic sale of companies which are of national importance, and have strong linkages with industry, transport, power and the defence sectors, should also be examined in the light of Trade-Related Investment Measures (Trims) under the World Trade Organisation (WTO). He says that imposing restrictions on foreign buyers after a PSU is acquired could be inconsistent and unenforceable under the WTO obligations of National Treatment.
The government should notify all measures that are not in conformity with Trims before divestment. It should also anticipate possible scenarios where business decisions of foreign buyers are likely to harm national interest (one example would be a foreign company deciding to export alumina from National Aluminium Company rather than convert it to aluminium for domestic use). That’s because the shareholders of the foreign company can challenge any agreement between a company and the Indian government if they go against Trims. Trims also gives the government of a foreign company the right to intervene on its behalf and defend it or even dictate what it can produce or export from India. The consequences of such situations need to be examined before permitting foreigners to bid for PSUs.
Fortunately for us, we have in Arun Shourie a minister who would be the first to realise the need for some course correction and fine-tuning of the disinvestment programme in order to answer legitimate queries. -- Sucheta Dalal
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