People's Democracy

CAG EXPOSURE 

On Privatisation Deals By NDA Regime: Corruption Unveiled 

Tapan Sen 

PRIVATISATION of public sector units has been an integral part of the neoliberal economic regime. This aims at handing over the resource-rich public sector units built up in the newly independent developing countries during the post world war II period till early eighties, to private sector, both domestic and foreign, at throw away prices. This crime to the national economy is sought to be made on the philistine plea of strengthening and restructuring the PSUs themselves on the one hand and also in the name of resource-mobilisation for meeting so called social sector development expenditures. Such economic philistinism of the neoliberalist camp has been and is being consistently opposed by the working class and the democratic movement in the country. 

There is again a section who seek to argue that privatisation is not a bad idea provided it is carried out in a transparent manner and without corruption. These so called middle roaders’ section actually play in the hands of the neoliberal camp. Because, the very concept of privatisation of public sector units with its huge resource-base, landed properties and the natural resource-reserves in their command is a corrupt one as any exercise of surrendering recurring source of income for one time monetary receipt does not stand the test of basic economic logic. Execution of such corrupt economic concept thus cannot be kept free from corruption. 

The experience of both partial disinvestment of PSU shares and wholesale privatisation through strategic sale practiced since early nineties clearly vindicated the above position frustrating even the purpose propounded formally by its protagonists. The disinvestments and privatisation have actually set in motion the process of demobilisation of resources as well as a new process of primary accumulation for the capitalist lobby, both domestic and foreign in the neoliberal regime. The process of partial sale of PSU shares during the Narsimha Rao government had attracted stringent comment from the then CAG as being underpriced sale resulting in huge loss to national exchequer. And when the NDA regime jumped in for wholesale privatisation, each and every case of strategic sale ultimately culminated in transfer of huge public properties to chosen private hands in lieu of tiny return to government exchequer and sometimes free of cost, if the post-privatisation claims are also taken into account. In fact corruption remained closely woven in every fabric of the privatisation process during the Shouri-days. 

The CAG report no 2 of 2005 had already exposed the ugly face of the single-bid sale of the star hotels of Hotel Corporation of India viz., Juhu Centaur and Airport Centaur at Mumbai where the government had deliberately indulged in irregularities through cultivating “inconsistencies in valuation of properties and fixation of reserve price, coupled with relaxation allowed to the bidder” reflecting “undue urgency to sell the properties” (in the language of CAG). And such “undue urgency” had been readily encashed by those predetermined buyers through resale of the properties with a huge premium within next couple of months following the hasty sale by the government. The matter is now supposed to be investigated by CBI as per statement made by the UPA government in July 2005.

The CAG report no 17 of 2006 tabled in parliament on the last day of the monsoon session scrutinised the strategic sale of nine PSUs viz.,Videsh Sanchar Nigam Ltd (VSNL), Modern Food Industries Ltd (MFIL), Bharat Aluminum Company Ltd (BALCO), Hindustan Teleprinter Ltd (HTL), Computer Maintenance Corporation Ltd (CMC), Indo Burma Petroleum Ltd (IBP), Paradeep Phosphates Ltd (PPL) and Indian Petrochemicals Corporation Ltd (IPCL), which were concluded between 1999-2000 and 2002-03.

As usual, this CAG report also revealed gross improprieties and irregularities in every stage of the divestment process, in every items of the exercise right from the preparatory arrangements and appointment of Global Advisors to authoring of the Shareholders Agreement (SHA) and Share-Purchase Agreements (SPA). A close reading of the CAG Report no 17 of 2006 brings to light that the end results of such “improprieties”, rather to put it in CAG vocabulary-- the “delays”, “inconsistencies”, “compromises”, “lack of coordination”, “inadequate documentation”, “relaxation of conditions” midway, “non-valuation of core assets and capital-works in progress”, “improper assumption in valuation process” “deficiencies in valuation”, questionable “efficacy of post closing adjustment clause warranting a critical review”, “absence of accountability mechanism” etc., has been gross under-valuation of the PSUs under strategic sale, and sell-out of huge national property as well as profitable business at throw-away prices to private buyers, besides, finally, advantaging those private sector buyers with such provisions in the Share holders Agreement (SHA) and Share Purchase Agreement(SPA) as would enable them to get back a substantial part of the price they paid to the government in the process of such distress-sale of PSUs.

PREPARATORY STAGE 

The CAG examination revealed that out of the nine PSUs sold out, four PSUs viz., BALCO, VSNL, PPL and IPCL, did not have titles to all the real estate owing to which “it would not have been possible for the value of such land to have been accounted for in the business valuation of the PSU for fixing the reserve price properly.” This is a matter of common sense that before selling a property or an establishment, the seller should ensure that the title-deeds of ownership of the concerned properties/establishments are ready in hand. But in the instant cases of PSUs, the disinvestment ministry just did not ensure this basic requirement, that too quite consciously. Consequently the asset valuer had either discounted or not considered the value of such properties. The result, obviously, has been fixation of improper (read lower) reserve price of the concerned PSU, thus a lower bid and sell off at a price much lower than the real value. 

Arbitrary Changes 

There are other means as well applied in subsequent stages to devalue the PSUs. . For example, conditions formulated at the time of inviting Expression of Interest (EoI) have been relaxed and modified just a few days before the last date of receipt of financial bid and in some cases even after that date. The stipulation for Earnest Money Deposit (EMD) of Rs 500 crore made at the time of inviting EoI in the VSNL case has been finally sought to be converted into a “bank guarantee” of Rs 100 crore and the decision was made public after the last date of receipt of the financial bid (February 1, 2002). Just two days before the last date of receipt of financial bid, i.e., on January 29, 2002 decision of granting “most favoured customer” status to VSNL by BSNL and MTNL to route their international calls through VSNL for two years after privatisation was announced by department of telecommunication. And on January 31, 2002 i.e., less than 24 hours before opening of the financial bid, the department of revenue decided to withdraw the court case against VSNL on its contingent income tax liability of Rs 1402.80 crore. These relaxation/concessions should not at all have been made. And secondly, had these relaxations/announcements been made before inviting the EoI, as should have been the case in the interest of transparency, there could have been more bidders and bid amounts would have been much higher which could result in government getting a much better price. As CAG has noted while referring to the issue of such last moment withdrawal of court case on contingent income tax liability, “ Had this process of withdrawal of contingent liability been decided by the ministry earlier …and the decision communicated to the bidders well before submission of the bids, a better assurance would have been provided…this decision had the potential of attracting more bidders,… with the attendant prospects of higher bids being offered.” (3.2.3.3) 

Similar midway arbitrary changes in the conditions and status of liabilities of the PSUs under disposal by the government injecting uncertainty and thereby affecting the valuation of the PSUs under strategic sale were also noted by CAG in case of PPL and IPCL. 

From the entire process and the replies given by the finance ministry justifying this midway or last moment activism process to favour the prospective buyers clearly reveals that such delays and hanging-on were deliberate to keep the number of bids and quantum of bid lower than its actual potential and deliver the benefits of such last-minute changes and relaxations to a few predetermined chosen players. And both had the effect of depressing competition and the selling price at the cost of government exchequer. 

INCONSISTENCY IN APPOINTMENT OF GLOBAL ADVISORS

The Global Advisor (GA) is supposed to be the most important technical expert in the process of disinvestment for assisting the government and the Department of Disinvestment (DOD) to enhance the sale value and the business valuation worked out by it formed the basis for reserve price in all the nine PSUs under disinvestment. The Global Advisors did just the opposite in all the cases. Further, CAG’s observation on the procedure adopted by the DOD in appointing the Global Advisors also does not give the government a clean chit. CAG pointed out many inconsistencies in the selection process of the Global Advisors in all the nine cases and finally commented that “… Global Advisors for all the nine transactions of disinvestment covered in this report were appointed on March 6, 2002 and there was no apriori threshold score or benchmark prescribed for shortlisting the bidders….”(3.3.2.1) 

Global Advisors (GA) so appointed in an inconsistent and nontransparent manner have left no stone unturned in obliging the DOD in its single point agenda to see the PSUs getting undersold. As the CAG noted, “the GAs have been given practically an open-ended offer without any accountability”. Formal agreement between the ministry and the GA was signed after considerable delay sometimes even after approval of the sale transactions by the government. In case of PPL the agreement was not signed at all. “ The GA was thus left contractually unbound for the entire period, which was not a good practice and did not provide assurance of professional handling of an important aspect of the process of disinvestment.” (3.3.5)

(To be continued)