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Raghuvir Srinivasan

OLD HABITS die hard. How else does one explain the Union Communications Minister, Mr Pramod Mahajan's anger over the decision of Videsh Sanchar Nigam Ltd.(VSNL) to invest Rs 1,200 crore in Tata Teleservice Ltd. in what appears to be a pure, arm's length business decision? That the government routinely interferes in the decision-making of public sector units is well known. Though bad per se it can possibly be justified on grounds that the government is the owner of the company and, hence, wants a say in its management. But how can the government poking its nose into the boardroom decision of a company that it has already sold, handing over management control to the strategic buyer, be justified? Especially where the company concerned has not done anything ultra vires the shareholder's agreement that it signed with the Government and has taken a pure business decision in good faith?

Needless controversy

The Government, and Mr Mahajan, appear to be on a rather weak wicket in the current controversy. The VSNL board appears to have acted well within its powers in approving the investment in Tata Teleservices and the subsequent clarifications offered by the company remove doubts that may remain. The fact is VSNL needs a direct interface with customers as it is no longer the only company in the International Long Distance (ILD) telephony arena. To survive and grow in the long term, the company needs to build a customer base of its own as ILD could soon turn into a commodity business. As of now, 87 per cent of VSNL's operating revenues comes from ILD; Internet service providing, which is the only part of its business with a direct interface with the customers, accounts for a minuscule 4 per cent of its operating revenues. In the not-too-distant future, when the ILD business will see multiple players, VSNL would be at the mercy of the basic telecom players such as Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) for its business revenues. As of now, the two have agreed to use VSNL's gateway for routing international calls emanating from and destined for their systems but that cannot be a permanent feature. Even now the agreement appears rather tenuous as seen by the spat between BSNL and VSNL over the settlement of their transaction revenues. In the emerging competitive scenario, VSNL's position could be compromised in the absence of a captive customer base.

Such a base can be built in two ways — either on its own or by acquiring a stake in a company that is already in the basic telephony field. Building up a base of its own would cost a lot of money and time. VSNL's own estimate is that it would have cost the company Rs 8,000-10,000 crore over 5-6 years. Even if the money is managed, time may prove to be the undoing factor. The present players in the basic telephony field are already busy building up their networks and by the time VSNL enters their domain, they would present imposing entry barriers. In short, VSNL, despite the large investment in building up is own basic network, may have still come a cropper in the market-share sweepstakes.

Alternatively, the option of buying into an existing player would help VSNL bypass the limitations of time and, to an extent, even money. The company could get access to customers for a much smaller investment and, importantly, do it in a much shorter time frame. That is exactly what it has done in investing in Tata Teleservices. The Rs 1,200-crore investment to be made over four years would give VSNL a 26 per cent stake in Tata Teleservices. Of course, the fact that the latter is a group company raises eyebrows. But if one considers the fact that the other basic players are in competition with VSNL in ILD and National Long Distance (NLD), for which it has acquired a licence, then the choice of Tata Teleservices would come into proper perspective.

Proper procedure followed

Having made the decision, VSNL also appears to have followed the prescribed procedures. The power to decide on investments in other companies is vested with the board of directors subject to certain conditions under Section 372 of the Companies Act dealing with inter-corporate investments. VSNL's decision certainly does not appear to be violative of this section either in letter or in spirit. It is well within the limit of 30 per cent of the subscribed equity capital of Tata Teleservices and the investment was made with the consent of the entire Board of Directors of VSNL, excluding one of the two government nominees who did not attend it. Of course, the other one has now chosen to "withdraw" his consent. But the fact remains that proper procedure was followed by VSNL in its decision-making process so far as the provisions of the Companies Act goes.

The only other constraining factor is the shareholder's agreement signed with the government at the time of transfer of control. While the agreement does talk about "asset-stripping", investment of free cash in business opportunities would by no means be covered by this definition. If one were to use that yardstick, privatised companies cannot do daily business without sanction from the Big Brother. The affirmative voting rights of the government envisaged in the shareholder's agreement can be triggered only when there is blatant siphoning of cash from the company in the form of investment in unrelated businesses of group companies.

The current one can hardly be termed that. The Disinvestment Ministry appears to share this view and has given VSNL the clean chit. Mr Pramod Mahajan's anger ought to be directed against his own nominees on the VSNL board. Had they voiced their dissent at the board meeting, VSNL could not have gone through with its decision. Blame for their lapse cannot be laid at the door of the company. In fact, the decision of one of them, Mr Rakesh Kumar, to "withdraw" his consent speaks very poorly about the independence enjoyed by the government nominees. Indeed, Mr Mahajan's angst appears rather misplaced in the light of the above facts.

Larger questions arise

The issues raised by the current controversy go beyond the mere facts of VSNL investing in a group company— larger questions arise over the propriety of the government in meddling with the affairs of a company that it has already sold out and the role that its nominee directors play on the board of the privatised company. Indeed, the drama of the past two days raises some serious questions for prospective buyers of government stake in public sector companies put up for privatisation. The action of Mr Pramod Mahajan and the manner in which it has been done, by going to the media first, sends some very wrong signals to such prospective buyers.

There simply cannot be any justification for continued government interference in the affairs of a company that it has already privatised. Such interference can be justified only on grounds of a serious violation of either the shareholder's agreement or the Companies Act and related laws.

The nominee directors are there anyway to take care of the government's interest. For this position, the government should opt only for professionals of the highest calibre and with integrity who can be trusted to protect the government's interest till the remaining stake is sold out. The two nominee directors have come out rather poorly in the VSNL case; one by not attending the crucial board meeting and the other by doing a volte face once the controversy broke out.

By coming out strongly in support of VSNL's action, the Disinvestment Ministry has probably done the right thing. This would send a strong signal to Ministers looking to stall the privatisation process. The Disinvestment Ministry should also consider if it is necessary to have a re-look at the shareholder's agreement in the light of the VSNL case. Loopholes, if any, that can be used by vested interests to stymie reforms, ought to be plugged.

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