Questions Galore For Minister Shourie (31 March 2003)
A recent success for the Union disinvestment ministry in its plans to sell
two giant oil company shares has been followed by yet another blow to the
disinvestment process when the Calcutta High Court set aside the sale of Jessop
& Co Ltd to the chronically loss-making Ruia Cotex Ltd.
Although the disinvestment ministry plans to challenge the Calcutta High
Court order in the Supreme Court, the issues raised at Kolkata have troubled
banks and institutional lenders for a long time. Ruia Cotex owes large sums of
money to institutions including the Industrial Development Bank of India and
IFCI. When it bid for Jessop & Co, these institutions had written to the
disinvestment ministry asking it to disregard the defaulting company’s bid. But
their request was ignored.
The disinvestment ministry’s stand, stated in Parliament, is that “the
government had no rules preventing a defaulter from bidding for or buying a
public sector undertaking (PSU) put up for sale”. This is, indeed, very curious
because the disinvestment ministry helps frame the rules for divestment. Since
Jessop had already been sold to a defaulter in February 2002, the disinvestment
minister may have been forced to defend the decision. But he can now use the
Kolkata judgement to change the rules. Instead of challenging the Jessop
judgement, he could turn it into an opportunity to correct some serious
deficiencies in the disinvestment process.
After all, the ministry’s stand is hard to digest. On the one hand, the
finance minister was so concerned at the mountain of bad loans plaguing the
financial sector that he introduced new legislation in the form of the
Securitisation Bill to help bankers recover their loans. Simultaneously, several
defaulters are allowed to cock a snook at their lenders by bidding for PSUs even
while they refuse to pay their lenders.
Surely two arms of government cannot have such divergent views on loan
recovery? This leads to the suspicion that disinvestment policies have been
framed to enable a few politically powerful defaulters in the oil, steel and
shipping business to bid for choice PSUs.
Jessop at least was a sick company, which attracted little buying interest
despite its land assets. But when defaulters bid for profitable companies such
as the Shipping Corporation of India or Hindustan Petroleum Corporation, it sets
up an ideal opportunity to enrich private sector industrialists through asset
stripping. We’ve already had one raging controversy on the subject when the blue
chip Tata group attempted to divert Rs 1,200 crore of VSNL’s reserves to the
loss-making Tata Teleservices immediately after acquiring the telecom giant. The
High Court order setting aside the sale of Jessop provides a wonderful
opportunity to stop defaulters from acquiring other PSUs.
Interestingly, the Kolkata petition filed by the employee trade union was not
merely about a defaulter acquiring Jessop. It was also about the low valuation
of Rs 18.18 crore for 72 per cent of Jessop’s equity. The low official bids have
already embarrassed the disinvestment ministry when the Centaur Hotel (airport)
at Mumbai was resold to the Sahara group at a hefty Rs 34 crore profit within
months of the original sale to Batra Hospitality. While the controversy over the
resale continues, it has prompted some important changes in the drafting of sale
agreements for other PSU companies.
In setting aside the Jessop Sale, Justice K J Sengupta of Kolkata reportedly
ruled that the sale to Ruia Cotex was “not in accordance with the law”; he also
criticised the valuation process. Not all arguments about the low valuation of
PSUs come from trade unions and congenitally anti-privatisation leftists. Last
week, a successful buyer of a strategically located hotel in Delhi gleefully
admitted that he had acquired the unit for a song by persuading the valuation or
reserve price to be lowered. He virtually conceded that the true valuation of
the property might be thrice as high. This source represents a group that is
aggressively in the race for acquiring several profitable PSUs offered up for
Given that a small cabal of investment bankers have been advising bidders, is
it inconceivable that they are advising clients to quote much less than the true
worth of government-owned companies?
Another mystery is the manner in which foreign companies, who initially
express interest in acquiring the PSUs and even make it to the initial short
list, have been backing out in the final round. It is interesting to note that
no foreign company, barring one, lost out in the final bids — they have usually
withdrawn from the race much earlier. Shouldn’t the disinvestment ministry pause
and check what is putting off foreign bidders, especially in case of hotels
where they have made substantial new investments in India? If they have problems
with the terms of sale, should this not be sorted out in the interest of
ensuring a higher price realisation for government?
Clearly, there are plenty of questions. But, as a PSU source worries that
there are very few answers because disinvestment minister Arun Shourie “is
blinded by the conviction that all arguments raised by people are aimed at
blocking and disrupting the sale process”. It would be a pity if this were true.
Indeed, a lot of criticism has come from people who support Shourie and the
They are just as repelled at the outrageously loss-making and pathetically
mismanaged companies nurtured by the government at taxpayers’ expense; but they
also wonder why such chronic loss makers are not being divested first.
More worrisome is the changing stance over the disinvestment of highly
profitable and rich oil companies. Why are defaulters allowed to bid for HPCL?
Why is government not seeking approval from Parliament before divesting these
companies? Why are contradictory policies followed about letting one PSU bid for
another? Why is Bharat Petroleum Corporation allowed to become the fief of the
petroleum minister by removing it from the oversight of Parliament, the Central
Vigilance Commission and the Comptroller and Auditor General? Why have
international bidders lost interest in acquiring Shipping Corporation of India?
These are not questions from irresponsible and ill-informed public
commentators who are opposing the government on the divestment process in the
name of a debate. They come from people who are concerned that hasty
privatisation would merely enrich private industrialists and is not in national