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A distressing sale

The proposed sale of BALCO, a profit-making PSU, to Sterlite Industries, is not just a distress sale as the Opposition is making it out to be. It is also a distressing sale in more senses than one.

I am not saying this because I am against liberalisation or our disinvestment policy. The government desperately needs to raise money. At the same time, it needs to cut down wasteful spending. An easy way to do this is by shutting down loss-making PSUs. You can save cash as well as balance your books. As Yashwant Sinha told you when he revealed the Budget, this nation can no longer afford to sit back and pray for a miracle. We have to either learn to live within our means or go bankrupt.

But that does not mean the Government can pick up any PSU and put it on the block. These have been built with public money, and the NDA manifesto is clear on the subject. We must first try to set right the health of our PSUs either by restructuring them or by bringing in private investors ready to work along with the government. Only where this is not possible and where ghe Government serves no useful purpose by being in the business, can the PSU be sold outright. But that sale must be well thought out and transparently conducted.

On both counts, the proposed BALCO sale fares miserably.

First of all, BALCO is not sick. It is in perfect health. It makes a profit in excess of Rs 100 crore. The recent drop in its earnings is not a consequence of business downturn. It is the result of a restructuring that yielded the government a neat sum of Rs 200 crore plus. However, despite this restructuring, the government wants to sell off 51 pc of the company to a strategic investor. So bids were invited. Three parties showed interest: Sterlite, Hindalco and Alcoa. Alcoa finally did not bid. Hindalco bid Rs 275 crore for the 51 per cent stake and Sterlite, Rs 551.5 crore. If there was no outcry, Sterlite would have bagged the deal. Now, it is stalled. But only till March 1, so that Parliament can debate the sale.

The arguments proffered in defence of the sale are simple. One, if BALCO is not sold quickly, its performance will further deteriorate and it will fetch a much lower price than it is currently getting. The example cited is that of Maruti. If the Government had sold its stake in Maruti well in time, it is argued, it would have got a much higher value than it will now get when Maruti is under severe pressure from competitors. True. But not entirely. The real reason for the drop in Maruti's value is that Sikhandar Bakht, when he was the minister in charge, gave away that critical 1 per cent equity to Suzuki, changing the 50:50 share holding pattern to 51:49 in favour of Suzuki. Now, as everyone knows, in a 50:50 venture 1 pc makes all the difference. In other words, Bakht lost us a huge sum of money and, what is worse, we will lose even more when the government tries to dispose off its minority holding.

The second argument is that the deal has gone through the Disinvestment Commission, an Evaluation Committee, the Inter-Ministerial Group headed by the Secretary, Mines, and the Core Group of Secretaries headed by the Cabinet Secretary, and, finally, the Cabinet Committee on Disinvestment presided over by the prime minister no less. Once the transaction is completed, all documents and contracts will be sent to the office of the Comptroller and Auditor General. In other words, everyone has examined the deal and cleared it.

But, as we all know by now, those who vet such deals form a neat and incestuous little circle. Particularly the bureaucrats who are, in the first place, responsible for most of the PSUs going sick. They are prompt to suggest for they have nothing to lose. They are not accountable to anyone. When the stink becomes unbearable, they can always pass the buck to the politicians. As for the CAG, who cares what it says? The telecom deal, where thousands of crores were lost when licence fees were replaced with a revenue sharing model, was severely criticized by the CAG. The CAG reprimanded the government for buying second-hand Sukhois. But who gave a damn? The deals went through.

The third argument is that the value obtained is the best under the circumstances. Wrong again! The value of BALCO's assets has been estimated at Rs 1072 crore and, according to the minister, 51 pc of that is Rs 547 crore. Sterlite's bid was Rs 4 crore more. But the fact is that a 51 pc stakeholder with complete management control does not only control 51 pc of the assets. He controls all the assets. Including the 270 megawatt captive power plant that BALCO commissioned in 1988, which operates at 86 pc efficiency today and, at current rates, could easily cost Rs 1200 crore to set up. Even if you depreciate it hugely, Sterlite ends up paying for the captive power plant and getting BALCO free!

There are many ways to value a company like BALCO and its assets. The two chosen in this case to arrive at a reserve price of Rs 514.40 crore are dubious and my friend Arun Shourie, the otherwise immaculate minister for disinvestment, could have a difficult time defending them. Not because he chose wrongly but because he may not have chosen wisely. In fact, whichever way you look at it, BALCO is a dud deal. The price is wrong. The methodology is opaque and unconvincing. The choice of buyer, unfortunate. Someone somewhere has made a terrible mistake and it needs to be quickly corrected. Otherwise, we have a serious problem of credibility out here.

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