PSU disinvestment: Selling family silver, learn from past, said former CMD of VSNL BK Syngal

The government is expected to raise Rs 15,000 crore from strategic disinvestment of public sector units (PSUs) in the current fiscal. Air India, BEML, Scooters India, Pawan Hans, Central Electronics, Bharat Pumps & Compressors Ltd Bridge & Roof Co, Projects & Development, Hindustan Newsprint and Hindustan Prefab are the family jewel that would be sold.

Public sector companies may not be innovative, transformative or agile, which is a need to survive and be relevant in the 21st century; but these companies have brand equity, prime immovable assets and operational set-ups, which have considerable embedded value built with taxpayers’ money. They should be divested thoughtfully.  

It must be understood that the public sector was created at a time when no one was interested in venturing into these capital-intensive industries. Their cost structure always included societal compulsions to serve the un-served. They served the nation, but fell into disrepute when they began to be treated as jagirs or fiefdoms for political and other favours, resulting in bloated manpower, poor work culture and attitudinal issues. This made them grossly inefficient for the quick footed competition from a market-savvy private sector.

Air India is ready to be sold off. Let us, for a minute, agree that it should be divested. But questions remain about why, when and how. The why part needs no explanation; the government must not be in the business of running businesses. However, when and how are serious matters. NDA- 1 had sold some PSUs like Videsh Sanchar Nigam Ltd (VSNL) to the Tatas, Hindustan Zinc to Sterlite/Vedanta, Indian Petrochemicals Corporation Ltd to the Ambanis, and a few hotels, at bargain basement valuations in early-2000. This allowed the acquirers to make obscene amounts of money by asset stripping alone.

Consider the crown jewel of disinvestment, VSNL, in 2002. The Tatas paid just Rs2, 100 crore, for about 45% of the company. Through this, they acquired investments in the satellite consortium, Intelsat, which they sold at a substantial profit. They also profited from vast tracts of land in prime locations of the metropolitan cities, fetching them anything between US$0.5 billion to US$1.5 billion. In recent times, they sold a residential plot in Chennai on Mount Road, opposite the Taj Hotel, for Rs195 crore.

There are many more such plots all over India. Within days of acquiring control over VSNL, after paying a meagre Rs2, 100 crore, the Tatas wanted to take out some Rs1, 200 crore of VSNL cash to Tata Teleservices to fund their capital expenditure. In 2005, the Tatas decided to write off Rs965 crore from shareholder premium account to clean the balance sheet of a profit-making company, denying the government and other shareholders from receiving two bonus shares for each share held by them.

Clearly, VSNL was not properly valued—not the investments, not the prime pieces of residential complexes, land and buildings in Mumbai, Delhi, Chennai, Kolkata, Bengaluru, Jalandhar, Ernakulum, Kanpur, Hyderabad, Dehradun, Pune, etc. There are at least a dozen or more complexes all over India at prime locations of the cities. There were acres of land around Delhi, Chennai, Pune and Dehradun for earth stations which were also not valued.

These assets can fetch around Rs5, 000 crore or more, in addition to the Rs7, 000 crore of land value under dispute which the Tatas have not allowed the government to encash for the past 15 years due to tax issues. Similar undervaluation happened in the case Selling Family Silver: Learning from the Past BK Syngal, VSNL’s most dynamic and successful chairman, recounts what went wrong during NDA-1’s privatisation effort, which offers invaluable lessons for the future.

The NDA government sold VSNL cheap in 2002 for a pittance of miserly 2,100 Cr or so. Similar undervaluation happened at Hindustan Zinc, Indian Petrochemicals and hotels like the two Centaurs in Mumbai, Lodhi and Ranjit in Delhi, Ashok at Thiruvanthapuram, Udaipur, Bengaluru Manali, etc.

All this happened because of unprofessional due diligence by government agencies of their own assets; and, at times, collusion. To top it all, shareholder agreements were outright defective, allowing asset stripping, with no provision to share either the proceeds with shareholders or seeking their nod for selling assets. The shareholders received a pittance of a dividend.

The point to be noted is that while the government needs to get out of businesses, it need not indulge in crony capitalism and scandalous undervaluation of public assets, as was the case during NDA-1. Any asset, especially a going concern, can be valued in terms of perception, brand, financial strength, growth prospects, relevance to the marketplace and peer comparisons.

The public sector units (PSUs) get a beating in terms of the perception, which results in poor evaluation without appreciation of the inherent and potential strength. It was this loophole which was used for asset stripping. It would be prudent for the government to have inventory of all the businesses and assets to be properly valued, confronting the buyers with the sum of the parts before divestment. We can’t change the past but we can learn a few lessons to avoid the pitfalls.

Here are a few suggestions, steps and caveats to be observed. Let’s start a debate on how PSUs need to be disinvested so that the government and the public get their due share. Since these are public companies, it is important that there is involvement of all parties during due diligence My suggestion is that the due diligence and valuation process should be made transparent and the public should have a say before a final decision and valuation for disinvestment takes place, with a time-bound schedule so that it does not become a never-ending process. For fair and proper valuation, PSUs and their unions should be involved.

What to Keep in Mind

1. To carry out an in-house computation of its net worth, taking into account the massive infrastructure, the land and buildings on the basis of its true market value. To my belief, that in itself would be mind bogglingly close to few billion rupees (50 to 60) for Air India and BSNL.

2. Get a sanity check of the valuation done by a good fi rm of chartered accountants or one of the top public sector or private Indian banks. To my mind, ICICI Securities and SBI Capital would fi t the bill. This would also provide a balance between private and public. Member (finance) of DOT (department of telecommunications) and a secretary from the ministry of finance must have an oversight.

3. Set a benchmark of valuation of the company in totality or various parts of the businesses; in the case of BSNL, say, towers, fibre network, switching equipment, each piece of real estate, etc. In the case of Air India, the aircrafts, the landing rights, the real estate, maintenance centres, ground handling, etc. Arrive at a valuation of each part and sum of all parts for a fair value and assessment. Never, ever, sell as one big ticket, like the NDA-1 did.

4. To test the potential, sell shares, say 10% to 15%, to financial institutions or list them directly on the stock market a la Reliance Communications in 2006 at Rs370 (today at Rs30).

5. A priori, get them listed. The listing would provide a benchmark. Post-listing, prepare for an IPO (initial public offer), either offering fresh equity or off-loading existing equity in favour of investors, say, around 10% to 15%. Whatever approach is taken, assure investors of the use of proceeds, like downsizing, etc.

6. After establishing fair value, go in for either strategic divestment or off-loading majority stake.

7. These steps might take three to six months, but would establish a credible value of the family silver. During this period, restructure boards, downsize manpower, consider incentives like employee shareholding, compensation, etc. Once this exercise is completed, say, in a total of six months, a benchmark price would be available for any company to be divested.

Caveats:

Any property which has no operational role must not be sold; any asset stripped post-divestment must be with specific approval of government with proportionate share of proceeds. There should be a robust shareholders’ agreement, to avoid situations like assets stripping and abuse of shareholder premium account to clean the balance sheet of a profit-making company like VSNL.

In short, the government needs to astutely sell the family silver. The public units served us when called to, but please remember that it is successive governments who destroyed them by interference and treating them as personal fiefdom (of politicians). Having committed one mistake of mismanagement, we should not make the second one—of selling them cheap.

Brijendra K Syngal is a former CMD of Videsh Sanchar Nigam Ltd (Now, Tata Communications Ltd). He led the first and the biggest GDR of an Indian company in overseas market and listing it at the London Stock Exchange. He has served as board of directors in leading global companies such as Inmarsat, Intelsat, ICO, Irridium, and Newskies. The views expressed by the author are his personal thoughts.