The Hindu Business Line : CAG raps NDA Govt on disinvestment deals

Home Page - Regulatory Bodies & Rulings
Industry & Economy - Disinvestment
Government - Politics
Web Extras - PSU
CAG raps NDA Govt on disinvestment deals

Our Bureau

`PSUs such as Balco, VSNL were undervalued'

CAG criticisms
Exercise of asset valuation were not taken with `due seriousness'
Inconsistencies in computation of equity value of the companies
Crucial decisions were made when the process of disinvestments was on
Inclusion of Post Closing Adjustment Clause

New Delhi , Aug. 25

The Comptroller and Auditor General on Friday came down heavily on the previous NDA Government for "undervaluing" a number of Public Sector Undertakings including Balco and VSNL.

"Audit examination reveals instances of far too conservative assumptions made by the global advisors in seven out of nine PSUs... The assumptions had the potential of adversely impacting the business valuation, based on which the reserve price was fixed for disinvestment," the CAG said in a report on disinvestment during 1999-2003.

"Audit noticed a general trend in the disinvestment of PSUs that majority of bidders, who had initially submitted Expression of Interest, withdrew during due diligence limiting the competition," the report tabled in Parliament said.

Failure of global advisors

The CAG attributed the lack of adequate interest among prospective investors to the failure of global advisors, who were unable to generate adequate competition at the bidding stage. "The Government also contributed to this situation by delaying crucial decisions, affecting the financial health of the PSUs," it said.

The report also said that the exercise of asset valuation did not appear to have been undertaken with "due seriousness" as the valuers were generally not given enough time and core and non-core assets had not been segregated before valuation.

Actions defended

The former Disinvestment Minister, Mr Arun Shourie, reacting to the allegation in the report regarding the lack of adequate interest among investors, said: "Every effort was made to get people interested. There were several EoIs initially but the fact is that after due diligence, they found the conditions were not conducive enough and independently withdrew their offers... No bidders were kept out."

Expressing surprise over the CAGs criticism over asset valuation, he said, "It is very odd observation. For running enterprises, it is generally the cash flow that is looked at... though I kept insisting that asset valuation is also done. No advisor came to us saying they needed more time."

Mr Shourie said the CAG's observation on lack of clear titles to the real estate and properties vindicates what he is saying. "After decades of functioning, these companies did not even have clear titles. We spent time putting these documents in order." Quoting from a Supreme Court ruling in the Balco case, he said, "In the end, the value of an enterprise is what the highest bidder is prepared to pay for it."

`Grossly undervalued'

Meanwhile, reacting to the report, the CPI-M said its stand that profitable PSUs had been grossly undervalued before being disinvested by the erstwhile NDA regime had been vindicated.

"We had maintained that PSUs like Balco had been grossly undervalued to provide benefit to the prospective buyers. Our position has been vindicated by the CAG," Party Leader, Mr Sitaram Yechury, told reporters here. He also demanded an inquiry into the NDA's divestment policy.

Computation variations

According to the CAG, there were inconsistencies in computation of equity value of the companies, which were disinvested. The methodology followed for asset valuation did not appear to be beneficial as the valuation was done without adequately considering all properties.

In the case of Modern Foods, certain core assets like leasehold land and plant and machinery were not valued under the asset valuation methodology. Similarly, in the case of Balco, leasehold land housing the plant and township were not valued under the asset valuation methodology. The CAG also pointed out that companies such as Balco, VSNL, Paradeep Phosphates (PPL) and IPCL did not have a clear title to all the real estate, land and buildings in their possession which would have made it impossible for the value of these assets to be accounted for while fixing the reserve price.

Delayed decisions

The report also said that the Government continued to change the goal posts even when the process of disinvestment was on. "Crucial decisions having substantial financial implication were taken after inviting Expression of Interest from prospective bidders in case of VSNL, PPL and IPCL," it said.

CAG also pointed out that the delay in demerging 773.13 acres surplus land of VSNL has not been carried out till date though the company was sold way back in 2002.

"As a result the land was still in custody of the disinvested company in which the buyer had management control and could acquire majority shareholding," the CAG said.

"In case of CMC, PPL, IPCL, IBP and Modern Foods, the Government had put options while in Balco and VSNL the strategic partners had call option. In case of Hindustan Teleprinters, no such option was incorporated," the CAG said.

The report also criticised the Government for including Post Closing Adjustment Clause under which the strategic partners could claim compensation from the Government for liabilities arising out of information that was not disclosed earlier. In the case of Modern Foods, the buyer had claimed Rs 17.48 crore as compensation and the Government had already paid Rs 12.64 crore to it. The claims of Balco, Hindustan Teleprinters and Paradeep Phosphates were still under consideration of the Government.

For future disinvestment, CAG has advised the Government to fix accountability on all involved in the process, ensure co-ordination between various arms of the Government and operationalise the National Investment Fund so that end use of the funds could be monitored.

More Stories on : Regulatory Bodies & Rulings | Disinvestment | Politics | PSU

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page