PURNIMA S. TRIPATHI
The sale of VSNL's
controlling shares to the Tata Group in 2002 at a fraction of their
actual price had shades of the 2G spectrum scam.
PTI
February 13, 2002: VSNL Managing Director S.K. Gupta, Union Communications Minister Pramod Mahajan and Tata Group chairman Ratan Tata at a function for signing the shareholders' agreement for VSNL in Mumbai.
THE government going out of its way, in fact bending over
backwards, to please a corporate house is nothing new in the telecom
sector. Much before the 2G controversy, a similar game was played out in
the telecom sector in 2001-02 when the then profitable Videsh Sanchar
Nigam Limited (VSNL) was disinvested and handed over to the Tata Group
through a transfer of 25 per cent stake at a fraction of its actual
price. The Bharatiya Janata Party (BJP), which now sounds so anguished
at the loot of public money, was the party ruling at the Centre then.
The VSNL, in which the Government of India owned 53 per cent share,
was a cash-rich company. It had a cash reserve and surplus to the tune
of Rs.6,000 crore and had made a profit of Rs.800 crore over the paid-up
capital of Rs.285 crore in the year ending 2000, prior to its
disinvestment. It had enjoyed the monopoly of all long-distance calls
then and was also the leading Internet service provider in the country
with more than half a million subscribers. Why was it disinvested? The
National Democratic Alliance (NDA) government argued that it was
necessary to infuse new capital into the company, bring in new
technology and revamp the management.
Industry experts, however, pointed out that the company was doing
well on all these three counts. It had high bankability, with a very
high credit rating, and could have easily raised capital from financial
institutions. Technology, as always, is not a domain for the service
provider; it buys equipment and services from the market. The VSNL
availed itself of the best available equipment and consultants at that
time and had an efficient management. Even in the highly competitive
Internet segment, it was far ahead of the private players even though it
had the licence to operate in only six cities unlike the private
players, who were given all-India licences.
Prabir Purkayastha, an industry expert, said that the decision to
disinvest VSNL reflected an ideological proposition that the government
should not be in the telecom business. According to him, by disinvesting
VSNL, the NDA government not only compromised the national interest
(telecom is a strategic sector and even the United States does not allow
foreign players in this area), but also showed scant business sense:
the company was a well-run entity, making profits and providing good
services.
The Left parties protested against the move and the issue was raised
in parliamentary debates. The Left parties said that the sale of
cash-rich public sector units amounted to selling the family silver to
pay the grocer's bill and that the government was selling assets to meet
its growing budget deficit and to please a few.
Also, the price at which VSNL shares were sold was ridiculously low.
The Tata Group was handed over 25 per cent of the company's shares for a
mere Rs.3,000 crore. VSNL then had a market capitalisation of about
Rs.10,000 crore and if its other assets, including land and property,
were to be taken into account, this was certain to go up to Rs.20,000
crore, even by modest estimations. So the Tata Group should have paid a
minimum of Rs.5,000 crore to get the controlling shares.
“The Tata Group utilised the deal to expand the services of its
telecom company, Tata Teleservices. The Internet segment was totally
neglected, with the result that VSNL has fallen far behind the private
players in this area,” says Dipankar Mukherji, a leader of the Centre of
Indian Trade Unions (CITU) who was then a Rajya Sabha member. He raised
the issue in the Rajya Sabha through a calling attention motion in the
monsoon session of Parliament in 2002.
CAG strictures
The Comptroller and Auditor General (CAG) also raised serious
objections to the deal. The CAG's 2006 report, while questioning many
procedures in the transaction, said that crucial decisions having
serious financial implications had been taken after inviting Expression
of Interest (EoI) from prospective bidders. It said that the EoI for the
selection of strategic partners was called on February 19, 2001, and
financial bids for acquiring 25 per cent stake in VSNL were received on
February 1, 2002.
Initially, one of the conditions was that the
prospective strategic partners should furnish an earnest money deposit
of Rs.500 crore in cash along with the financial bid. This was changed
later from Rs.500 crore in cash to Rs.250 crore in the form of
irrevocable bank guarantee. This was further reduced to Rs.100 crore, as
per a note of the Ministry on February 2, 2002, that is, after the
final financial bids had been received.
The CAG also pointed out that the decision to indemnify the strategic
partner to the extent of 25 per cent of the total tax liability subject
to a maximum of Rs.150 crore payable by the disinvested PSU, if certain
deductions claimed by the latter under Section 80 (1A) of the Income
Tax Act were not finally allowed, was taken only on January 17, 2002,
after the EoIs had been submitted almost a year earlier.
The Ministry's explanation for the delay of both these decisions was
not found to be satisfactory by the CAG. In fact, the government
approved both these decisions on February 5, 2002, after the
disinvestment of VSNL on February 2, 2002. The CAG has noted that if the
government had taken both these decisions before the disinvestment, it
would have not only instilled more transparency into the process but
fetched a better price.
The decision conferring the most favoured customer status to VSNL by
Mahanagar Telephone Nigam Limited (MTNL) and Bharat Sanchar Nigam
Limited (BSNL) for routing international long-distance calls by the
latter through VSNL at market rates for a period of two years after the
transfer of management control to the strategic partner was communicated
by the Department of Telecommunications to VSNL on January 29, 2002,
which was two days before the receipt of the financial bids. The CAG
pointed out that the most favoured customer status to VSNL was awarded
only after the bid was finalised in favour of the Tata Group.
The CAG report says the Ministry of Disinvestment was aware that if a
clarification was issued to the effect that the two sister PSUs, namely
BSNL and MTNL, were directed to route their international calls through
VSNL at least for some length of time after disinvestment, it would
make the offer more attractive. But the Ministry of Disinvestment took
the decision only on December 23, 2001, though the EoIs for the
selection of strategic partners had been invited and closed in February
2001.
The Ministry of Finance could not explain the delay when asked by the
CAG. One cannot help noticing the similarity with the procedural
irregularities that are now being talked about in the 2G spectrum scam.
Another procedural irregularity pointed out by the CAG was the
withdrawal of the contingent liability of Rs.1,402.80 crore on VSNL just
a day before the bid was opened. There was a dispute between VSNL and
the Income Tax Department about the deduction of Rs.1,402.80 crore. VSNL
claimed it as “deductible expenditure under Sec 37 of the Income Tax
Act”. The Income Tax Appellate Tribunal passed an order in favour of
VSNL, against which the IT Department had appealed in the High Court,
and it was only on January 30, 2002, that the Department of Revenue
agreed to withdraw the case.
The Ministry of Disinvestment conveyed this to the prospective
bidders only on January 31, 2002, the day before the financial bids were
to be opened, February 1. The CAG pointed out that if this had been
done earlier and the bidders had been informed before the submission of
their bids, it would have attracted much better offers. All the more so
since the amount of contingent liability was almost as much as the price
at which the company was finally sold to the Tata Group.
Another major irregularity pointed out by the CAG was the deliberate
delay in demerging identified surplus land. The CAG pointed out that
773.13 acres (one acre is 0.4 hectare) of land belonging to VSNL had
been declared surplus 10 days before the receipt of financial bids and
the cost of this land was not added to the valuation exercise to
estimate the value of VSNL. The explanations given by various Ministries
were not found to be satisfactory by the CAG.
Explaining the lack of popular outcry against such serious
irregularities on a deal that sounds as scandalous as the 2G scam,
Purkayastha said that in those early days the telecom sector had just
begun to evolve and the implications of the deviations were not yet very
clear.
But, he said, one thing was clear even at that time: there was a
clear corporate war and the government of the day was bending over
backwards to woo two powerful corporate houses, the Tatas and the
Ambanis. If the Tatas were handed over the cash-rich VSNL on a platter,
the Ambanis were handed over the equally profitable Indian
Petrochemicals Limited (IPCL), which gave them certain monopolistic
powers in the petrochemical sector. “It was a Tata versus Ambani fight,
and the government was trying to placate both,” he said. According to
him, the VSNL deal was a “sweetheart deal” in the sense that it was
almost a “negotiated privatisation” with a total lack of transparency.
Cherry on the cake
How did the Tata Group benefit from this? Barely three months after
taking control of VSNL, it siphoned off Rs.1,200 crore from VSNL's cash
reserve to fund the expansion of Tata Teleservices. This became a big
bone of contention between the then Communications Minister Pramod
Mahajan and Disinvestment Minister Arun Shourie, but the Tata Group
succeeded in doing what it wanted.
“Since then, the Tata Group has leveraged the huge resources
available with VSNL to expand its telecom company's operations at the
cost of VSNL whose primacy in the long-distance call services and
Internet services has been seriously compromised,” Purkayastha said.
The Tata Group also benefitted by acquiring cross-over licences: it
acquired licences to operate in both CDMA and GSM segments without any
additional financial burden. According to industry experts, the telecom
business is the Tata Group's main priority, and so VSNL has been
relegated to the sidelines with the result that the necessary investment
to improve infrastructure at the back end is not happening.
This should be obvious to anyone using Internet services or
long-distance call services. Private players in the long-distance
segment and in Internet services have overtaken VSNL. The broadband
services offered by VSNL remain one of the costliest in the world and
the quality leaves much to be desired.
“The Tata group is least interested in improving the Internet
services. Their main priority is mobile telephony, with the result that
Net access to common people, which VSNL was aspiring for, remains one of
the lowest in the world,” said Purkayastha.
“It was a deal we call cherry picking. VSNL was like a cherry which
was handed over to the Tata Group, and how does it matter now how that
cherry tastes? With such massive growth in the telecom sector, there
cannot be any comparison between the private players now in the field
and VSNL, which once was a master in this domain. Even if the company is
showing good results, how does it matter because we know its quality
has gone down,” said Dipanker Mukherji.
In hindsight it does appear that the BJP, which is making such a song
and dance about the 2G or Antrix controversy, is an equal partner in
the crime. It was the NDA government that set the ball rolling. The
United Progressive Alliance (UPA) is only following in its footsteps.
No comments:
Post a Comment