PRIVATISATION SCANDAL 

Now, ‘Post-Closing’ Fraud!   

Tapan Sen

EVEN as the international agencies frequently revise the credit rating of Indian economy consistently downwards, a renowned business weekly, owned by a big corporate house, has rated, the minister for disinvestment, Arun Shourie nine plus out of ten. Shourie has earned praise not only for speeding up the pace of wholesale privatisation of public sector undertakings (PSUs), but also for his ‘skill’ of successfully bringing only the highly profit-making and highly-asset rich PSUs within the privatisation net and also setting the mechanism of shedding the PSUs practically free of cost. The sell-off exercise devised by him has already earned Shourie the most dubious distinction --- as the only salesman in the country who maligns the product he offers on sale, before he actually sells it.

Each and every deal of privatisation, as it goes on, has surpassed the record of previous sell-off in terms of the damage inflicted on the national exchequer and the fortuitous gain for the private buyers, as also for those in the governance handling the ‘deal’. The whole process of such handling (or mishandling?) the public property in the PSUs does no more remain a hush-hush, under-the-table affair. It has been institutionalised by the disinvestment ministry by laying down the methodology and mechanism of under-valuing and under-pricing the PSUs under sale. In the era of neo-liberal globalisation, loot of the national wealth of developing countries has to be the natural course. It is to the credit (sic!) of Shourie that such loot has been systemised through the Disinvestment Manual authored and published by him.

PRIVATISATION DIARY

The diary of privatisation conclusively establishes the above point. Each and every PSU, put on sale so far, has fetched for the national exchequer less than one-tenth of its real value. As the events are unfolding in the post- sell-off scenario, privatisation in many cases ultimately means no inflow but an outflow from the national kitty. Some of these are yet to be fully quantified.

To recollect a few:

BALCO: (Bharat Aluminium Company)  Asset value of more than Rs 5000 crore; 51 per cent stake handed over to Sterlite at Rs 551 crore. Sterlite has started sending alumina from BALCO to its wholly owned India Foil at below-cost, concessional price. The Govt of India, with 49 per cent stake is sitting silent.  This is one method of draining out resources from BALCO after gaining control over this cash-rich PSU.  

*VSNL (Videsh Sanchar Nigam Ltd): The government handed over 25 per cent share and absolute control of the VSNL to the Tatas for Rs 1439 crore. Tatas purchased another 20 per cent share of VSNL from the market at Rs 1551 crore (Rs 112 crore  more).  This clearly revealed gross under-pricing by government in favour of the Tatas. Very soon, the Tatas pumped out Rs 1200 crore from VSNL to Tata Teleservices Ltd. This is another variety of “draining out resources.”

*Paradip Phosphates Ltd (PPL): Valuation by the agency appointed by the disinvestment ministry was at around Rs 250 crore. The ministry rejected the same. Another team then brought down the valuation of PPL to almost less than half. The PPL was handed over to Zuari-Mardock combine at Rs 151.7 crore on the basis of practically single-bidding. The ‘post- closing adjustment’ clause, inserted in the sell-off agreement, was utilised by  Zuari-Mardock to claim Rs 192 crore from the government. Net result: the PPL has become a free gift to the Zuaris plus Rs 41 crore cash bonus!

*Modern Food India Ltd. (MFIL): Fourteen manufacturing facilities for bread and bakery products, 4 facilities for energy food, and one unit for extruded food, along with 17 franchises and 8 ancillaries with huge landed assets in prime locations of major metropolitan cities were picked up by the fast food major, Hindustan Lever (HLL), at around Rs 104 crore.

*Jessop:  Assets worth Rs 250 crore; 72 per cent equity was sold to Ruia Kotex of the Ruia Group at Rs 18.18 crore. As a part of the deal, the sale value of five acres of land sold to Metro Rail (Rs 14 crore) during early 2002 will be refunded to the Ruias. Ruias will get Rs 11 crore for purchasing raw materials. End result: Rs 6 crore gratis to the Ruias and “Jessop free of cost”! Besides, all loans and liabilities of Jessop will be waived. The privatised Jessop has been favoured with a two years’ purchase preference from Railways, ensuring guaranteed order book position. (The deal is not clinched yet because of the Calcutta High Court’s stay order).

*Centaur Hotel at Mumbai: Sold to Batra Hospitality, known to be close to Sangh Parivar for only Rs 83 crore in February 2002. Land value itself is much more than the sale price, not to speak of the buildings and other properties. The Batras transferred the hotel to Sahara Group with a 39 per cent premium at Rs 115 crore, within four months, making a bounty of Rs 32 crore!

*CMC, HTL, IPCL: Story is the same under the stewardship of Shourie ---- sold to chosen private buyers at throw-away prices, much below the real value of their huge assets base.

*Similar exercises for hasty sell-off are going on with highly profit-making and cash-rich petroleum companies, HPCL and BPCL, and also the aluminum major ---- NALCO (National Aluminium Company) in Orissa. The investment analysts have assessed the enterprise value of NALCO at more than Rs 30,000 crore. The past record of PSU sell-off and Shourie’s one-track mind are destined to handed over NALCO to the Birlas in lieu of a very small fraction of its real assets value. 

'POST CLOSING'

All along Arun Shourie has summarily rejected the hue and cry by the opposition regarding the undervaluation of the PSU assets under sale. He said that for a running company, asset-valuation was not required at all. The journalist-turned-sale minister of the NDA government discarded the ‘asset valuation method’ and invented ‘discounted cash flow method’ to facilitate under-selling of the highly asset-rich PSUs. But, the self-same Shourie had devised a provision of ‘post-closing adjustment’ in the sell-off agreements for the PSUs. It laid down that the government would make good to the private buyer the difference between the assets value presumed as on the date of the divestment and that at the end of the financial year as reflected in the balance-sheet. The government or for that matter the minister of disinvestment, knows fully well that, post-privatisation, the balance sheet will be drawn by the private owner. Yet, this dubious clause was inserted to favour the chosen buyers.

The result is before everyone to see. As noted earlier, the Zuari-Mardock combine is going to get back Rs 192 crore after purchasing the PPL at Rs 151.7 crore, that is, PPL free of cost with Rs 41 crore as bonus!

The same palm-greasing deal is evident in case of the HTL! The HTL was sold to Himachal Futuristic at only Rs 55 crore (for 74 per cent equity), which itself was a case of gross undervaluation. At the time of sale, the assets value of HTL was assessed by Shourie & Co at Rs 57.36 crore. Then the Himachal Futuristic finalised the annual accounts of the company, rendering the net assets value of HTL negative. So the Himachal Futuristic, has lodged a claim of Rs 56.49 crore from the government as ‘post-closing adjustment.’ The government has already paid a substantial part of the claim and ultimately the private company is going to get HTL free, plus some more offering in cash!

On the same ground, the infamous Sterlite, the hot favourite of Shourie, has lodged a claim of more than Rs 30 crore as ‘post closing adjustment’ of BALCO  sale and is certain to be obliged by the government. The Hindustan Lever (HLL) too did not fail to avail of the provision of ‘post- closing adjustment’.  It has lodged a claim of Rs 17.48 crore, of which the government has already returned Rs 12.64 crore to the HLL. The government had also to remit similar cash prizes to the buyers of the ITDC Hotels. They got the hotels at throw-away prices and thereafter got back substantial portions of the money (Rs 27.5 crore) they had paid, as post- closing adjustment.

DEVIL’S LOGIC

The Disinvestment crooks of the NDA government seek to cover up the crime committed by them by putting forward a devil’s logic. They seek to project the ongoing distress sale of PSUs as profitable for the government. They have claimed that the prospective interest earning, at the market rate, on the sale proceeds of a particular PSU would come to much more than the dividend earned from that PSU. The disinvestment ministry is indulging in a statistical jugglery here. While calculating the interest on the sale proceeds, these salesmen do not take into account the money that flows out to the private buyers under the provision of ‘post-closing adjustment.’ Secondly, the interest calculated on sale proceeds is only notional as the government is nowhere going to park the PSU sale proceeds in interest-bearing assets. Even this notional calculation cannot justify the sacrifice of the sources of recurring income to the exchequer, in lieu of one-time money as sale proceeds. After all, selling the family silver for paying the butler cannot be called economic prudence. 

In the name of disinvestment, the assets of the nation are thus being robbed of. The disinvestment process has set a mechanism of desperate loot by the private corporates, both domestic and foreign, and also by those handling the process.