Financial Daily from THE HINDU group of publications
Thursday, May 12, 2005
Industry & Economy - Disinvestment
`Mud slinging is an occupational hazard'
D. Sampath Kumar
What the market is going to bear is not known to anybody, certainly not to civil servants, journalists or financial advisors, says Mr Arun Shourie. Bijoy Ghosh
Chennai , May 11
FORMER Disinvestment Minister Mr Arun Shourie has been under attack over the sale of Juhu Centaur hotel in Mumbai. The Comptroller and Auditor-General has made critical remarks about the way the Ministry handled the sale. The winning bidder, Tulip Hospitality Services Pvt Ltd, was a solitary bidder who paid Rs 153 crore for the hotel, against the reserve price of Rs 101 crore.
The criticism by the CAG and other political parties have been on the grounds that the sale was done to the solitary bidder, that the Government realised much lower than what the market would have paid and that Mr Shourie himself facilitated bank financing of the deal.
In an interview to The Hindu group of publications, Mr Shourie expressed his position on these points. Excerpts:
The CAG says there was only one bidder, so the benefit of competition was not there...
You can never meet these arguments. When there is competition, the allegation is that the price is fixed in any case. I'll give you two examples. In VSNL, the Tatas bid Rs 1,493 crore and Reliance bid Rs 1,400 crore. It was most keenly competed. That was a great boost to us in the Ministry because people were always saying that Reliance will either fix the match or get to know what is happening inside but they lost only by Rs 93 crore. They were very upset. But what was the allegation? It was said, "the very fact that the bids were very close shows that the bids were fixed."
Then in the case of Balco, Sterlite bid Rs 550 crore. Birlas bid Rs 235 crore. The criticism was, "how is that the other person, equally competent has bid so low? That shows the conspiracy, because he has deliberately bid so as to make the other's bid look attractive." I know how hard Mr Kumar Mangalam Birla tried to get Balco. CAG says that there was only one bidder and, therefore, the benefit of competition was not there. You can't hold these people (bidders) long. In many cases, these people were belaboured, sometimes manhandled. In the case of Balco, the Secretary of the Ministry had to go with police protection. Why would the bidders stay? He is not doing you a favour, he is coming for business. When he gets a glimpse of such things, he says, "arey baba, if this is what is happening here, let's go to China."
So, given the atmosphere, it was difficult enough to get the solitary bidder?
Yes. We have to be thankful that there was at least one bidder. You have to look at the circumstances in which disinvestments have to be done, especially when governments can be shown to be someone that you can push them around, it becomes impossible to hold these people. See what is happening in Great Eastern Hotel in Kolkata. The process (of disinvestments) has being going on for a decade. It has been reported that one of the bidders - Kennelworth - has suddenly left the field, without citing any reason. Could anyone ask the bidder why he was abandoning the bid?
But was the timing of Juhu Centaur sale wrong? It was just after 9/11 and the entire hotel industry was looking shaky? Could you not have waited longer?
This is the standard argument always "why not wait". I tell you, if a process has already taken five years, there is never going to be a right time. How do you know tomorrow there will not be another 9/11? Is the stock market going to be better tomorrow or worse? So, when the process comes up for completion, you should go ahead.
Also, postponement is disastrous for another reason the general image of India is that it cannot carry through its decisions. Second, if you start postponing for such reasons, then for business rivals it would be an easy incentive to create a situation which would lead to a postponement.
But September 11 was not an ordinary event?
Yes, I know. But anyone could easily see that it was the beginning of a long process of war. President Bush and all had taken on terrorism as an enemy. It was to be a long, protracted war. But I would like to know if anybody could have said that November was going to be better at that time.
But the Centaur sale episode indicates that the Disinvestment Ministry's price discovery mechanism is appropriate... .
But how? Nobody told us that at that time. You please look up the financial papers when I went forward with these five or six IPOs and just see what the great financial wizards were saying at that time. "Wrong timing!" "Too much crowding!" "Indian market doesn't have depth, this is actually a way to beat down the prices!"
Then when we indicated the prices, everyone said "overpriced". So much nonsense was written at that time. In the cases of Maruti and ONGC the criticism was that they were overpriced. What the market is going to bear is not known to anybody, certainly not to civil servants, journalists or financial advisors.
A good case is IPCL. The reserve price was Rs 131. Ambanis thought it was worth Rs 231. Nirma thought it was worth half that. IOC had bid Rs 128. Did that show that my valuation was correct? Or that I had undervalued it because Reliance paid Rs 231?
In CMC, the Tatas paid Rs 177 per share. The price went up to Rs 800, because it became a part of TCS. In the case of VSNL, they paid Rs 212 and it went down to Rs 80. Did we overprice or under-price?
Another example is that of IBP. IOC paid Rs 1,561. It is today Rs 539. Should you now penalise IOC? Supposing it (IBP) were not a public sector company would you say that IOC is wasting Government money in such high bidding?
An even better example is IPCL. IPCL had three plants Baroda, Nagathone and Gandhar. When Mr Arun Jaitley was the Minister the Cabinet decision was disinvestment of IPCL. Then the portfolios were changed and I was given the charge of this Ministry. Then, Mr Pathan, the CMD of IOC came to me and said, "please hive off this Baroda plant and give it to IOC. We'll pay a fair price. Because it is adjacent to IOC plant, it uses the throughput of IOC." After a great struggle, I went back to the Cabinet and said, "Please rescind your earlier decision and start again". Now the question was, how much should IOC pay IPCL for the Baroda plant? IOC appointed some big fellows and valued it at Rs 300 crore. IPCL appointed equally big fellows and valued it at Rs 1,300 crore. This difference could not be resolved for eight months. This was referred to the Committee of Secretaries on dispute resolution, headed by the Cabinet Secretary. Then, I had to go back to the Cabinet and say, "Sirs, I was wrong. Please restore your earlier decision."
On the allegation that you met bank Chairmen to facilitate funding for the bidders?
That is one part of the CAG report that is not worth of a constitutional authority.
What happened? The gentleman wins a bid. I have learnt from the telecom experience that people bid very high and then walk away. So we prescribed a bank guarantee in case you win, and don't pay, you lose the amount. In this case, Rs 5 crore was prescribed.
This gentleman bid. Reserve prices were Rs 101 crore and he had bid Rs 153 crore. A few days before the deadline for payment, he sent a letter saying that he needed some more time. Our apprehension was that he might try to wriggle out. Was it prudent for me to take the Rs 5 crore and thereby lose the Government Rs 50 crore? We gave him extension on the condition that the bank guarantee would be increased to Rs 15 crore and if he did not pay (within the revised deadline) he would lose the Rs 15 crore.
He accepted this and he said he produced a bank guarantee from a bank called Allied Bank of Boston. Our officers examined it and said "we cannot accept it", because there were some vague phrases, which did not crystallise the liability of the bank in the event of a default. We also did not find any reference to this bank in S&P and Moody's registry of banks. So for reasons that were recorded, we said we could not accept the bank guarantee.
Then he said Indian banks were prepared to lend money to him for the purchase. We said, "we can't take your word for it." To which he replied that banks were willing to come to the Ministry and say it themselves. That was the meeting.
This is projected as if I had facilitated financing of the deal. It was the opposite. None of us in the department took this man's word at face value and therefore went through all the precautions.
We were worried that bidders might get out of the bids once they realised they had bid much more than the reserve price. They get out of it, losing the bank guarantee.
You should do the right thing only, in the knowledge that such mud slinging is a part of conditions of employment. Should Mr Pranab Mukherjee stop defence equipment purchases today just because mud is being slung at Mr George Fernandes?
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2005, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line