Sucheta Dalal :It Is Not OK Mr Tata (3 June 2002)
Sucheta Dalal

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It Is Not OK, Mr Tata (3 June 2002)  

It is most disconcerting to find myself on the same side as telecommunications minister Pramod Mahajan. Last fortnight, I was pointing out that he had stripped the assets of Mahanagar Telephone Nigam Ltd by arm-twisting it to invest Rs 250 crore in the defaulting, loss-making Maharashtra Krishna Valley Development Corporation bonds. Apparently, he also forced MTNL to invest Rs 100 crore in ITI. Last week, he grabbed the high moral ground when the Tatas did exactly the same on a much larger scale and resolved to strip Rs 1,200 crore of VSNL’s reserves to support Tata Teleservices Ltd — a loss making basic services operator in Andhra Pradesh.

Unfortunately, one has to side with Mahajan this time because, if our most ethical business group is allowed to strip ex-PSU assets with such impunity, it will be the norm for all others. Can we refuse to recognise the role of the police because many of them are corrupt and in cahoots with the crooks? The Tatas may parade any number of friendly analysts and lawyers to justify the business logic and their legal rights to strip VSNL’s assets. Or gloss over the fact that they took advantage of the notoriously somnolent government directors and eminent public representatives (in this case CII luminaries like Subodh Bhargava and Suresh Krishna) on VSNL’s board. But they cannot escape the fact that the deal and its timing stink.

VSNL should be a wake-up call for all stakeholders of VSNL and other divested PSUs, and it should also force the disinvestment ministry to build in additional caveats into future shareholders agreements. Let us examine what these are.

First, it is indeed true that government directors, institutional directors and public nominees have slept through board meetings or worse and allowed asset stripping for several decades. That is precisely why the Tatas’ attempt to strip VSNL’s assets with such outrageous speed should be checked. When the government decided to retain a 26 per cent stake in companies after divestment, it said that this would allow it to watch over how the private sector dealt with the family silver. It was also meant to reassure employees that government was not abdicating its role. In fact, government can adopt a hands-off attitude only at its own cost.

If government argues that the ethical Tatas were within their rights to strip VSNL’s assets, we will see all other divested PSUs being stripped off their assets in the shortest possible time. They may end up dumped as sick companies leaving financial institutions and banks saddled with more bad loans. Disinvestment minister Arun Shourie has done a terrific job with privatisation, but unless he ensures that PSUs actually flourish after privatisation, his efforts will be permanently blighted and reduced to an indiscriminate fire sale. Banks and institutions should be especially worried at the VSNL decision, because they have been funding several recent bids and already have loan exposures to what were earlier government companies. The government’s experience with Modern Bread is clearly no indicator about the future of disinvestment.

Thirdly, let us remember disinvestment secretary Pradip Baijal’s statement after the controversy. He admitted that over Rs 2,200 crore of assets and large undervalued properties were left in VSNL because its size warranted it. In which case, taking away the reserves clearly weakens the company. If the Tatas are allowed to get away because they are technically correct, then the divestment rules should be amended in future deals to require inter-corporate loans and investments to be ratified by a special resolution of the shareholders.

As for the investment itself, are the Tatas saying that TTL will not route business through VSNL without an expensive equity investment? Also, the Rs 1,200 crore valuation for a 25 per cent stake suggests that the loss making and puny TTL is as valuable as the giant VSNL where the Tatas paid around Rs 2,500 crore for a 45 per cent stake. What is shocking is that many analysts commenting on the deal seem unconcerned about this fact.

The Tatas also suggest that they have offered VSNL a bonanza and that a future investment would have been at a premium. This is utter nonsense. Look at the share price of Hughes — it’s Rs 6.20. Nobody knows which companies would survive the intense competition in the telecom business and the Tata performance so far hardly inspires confidence. In fact, one needs to ask VSNL chairman S K Gupta whether he himself is holding on to his own shares in the company or has he tendered them in the open offer?

Is the hasty judgment to opt for basic services the best decision for VSNL, even if TTL acquires Hughes Why isn’t a foray into the less expensive and fast growing cellular business a better option? Or for that matter, isn’t it better for VSNL to secure its 43 million subscribers through a National Long Distance offering as part of its vertical integration instead of jumping to the last leg in such a hurry? Why has VSNL made no attempt to tie up with Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd before investing in TTL? Telecom experts are asking these questions. They also tell us that it would have been far better for VSNL to develop its existing project such as Jalamala, ATM switches and creating points of presence for bandwidth distribution first.

Incidentally, here is what Merrill Lynch has to say about VSNL even while maintaining its Strong Buy recommendation: “VSNL’s FY02 results were disappointing and accompanied by a proposed investment of Rs 12 bn in Tata Teleservices which we believe is premium priced”. It says that the deal’s “implied equity valuation at US$ 980 mn is the same as Bharti Telecom although TTL has only one operational circle as against Bharti which owns a raft of mobile operations across India, in addition to a successful fixed line franchise in MP and 4 new fixed line circles.” The Merrill Lynch review also says that it is worried about the treatment of minorities (shareholders).

The purely legal defence of their VSNL decision makes the holier-than-thou Tatas sound like another large industry group, which they would hate to be compared with. Sorry, but it’s not OK, Mr Tata.

-- Sucheta Dalal