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NEW DELHI, Feb. 27

THE Union Government has decided to sell its residual stake of 26 per cent in Modern Food Industries Ltd (MFIL) to the strategic partner, Hindustan Lever Ltd (HLL), at Rs 11,489.56 per share, in the first case of a full-fledged privatisation of a Government company.

The sale is expected to fetch Rs 44 crore to the Government's disinvestment kitty.

As per the shareholders' agreement, the Union Government had retained the right to exercise the put option to sell its residual stake after one year of the transfer of management control in MFIL to HLL.

"The proposal submitted by the Ministry of Disinvestment to exercise the put option and sell the residual equity in MFIL was approved by the Cabinet Committee on Disinvestment at a meeting here on Wednesday," the Union Minister of Disinvestment, Mr Arun Shourie, said.

According to the put option clause in the shareholders' agreement, HLL has to buy the remaining shares from the Government either at the price paid while acquiring a controlling stake in MFIL in the first tranche or the fair market value, whichever was higher.

The fair market value is determined on the basis of each of the net asset value, discounted cash flow and the price earnings multiple valuation methodologies.

Applying the above methodologies, the fair market value of MFIL shares was Rs 11,292 per share whereas the transfer price was concluded at a higher level of Rs 11,489.56 per share.

"The CCD decided to sell the Government's balance 26 per cent stake in MFIL at Rs 11,489.56 per share after adjusting for the admissible pending claims on post-closure adjustments as per the agreements," Mr Shourie said.

The Government had sold 74 per cent of its equity in MFIL to HLL on January 25, 2000, which fetched it Rs 105.45 crore and the company Rs 20 crore. The management control was handed over to HLL on January 31, 2000.

The decision to sell the remaining stake in MFIL was taken, keeping in view the steady growth registered by the company wherein bread sales had almost doubled (94 per cent increase). The employees of MFIL had also benefited from the strategic sale in terms of average increase in wage of Rs 1,600 per employee per month, which would have been impossible if MFIL had remained in the public sector since it was a loss-making company.

HLL also gave financial support to MFIL in the form of Rs 16.5 crore as secured loan, corporate guarantee for Rs 9.5 crore and Rs 25 crore for VRS.

Though a reference has been made to the Board for Industrial and Financial Reconstruction (BIFR) as per statutory requirements due to the erosion of the entire net worth of MFIL, HLL has categorically indicated its keenness to turn around the company on its own rather than seek any relief.

"Given the success of the strategic sale and the nature of the sector in which MFIL operates, there is no justification for the Government holding 26 per cent stake in the company. In fact, the Government's presence might constrict HLL from infusing funds liberally through various routes to meet the capital requirement of MFIL," Mr Shourie stated.

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