The NDA government’s failure to sell the proposed 76 per cent in Air India brings back the focus on the important issue of governance of public sector units (PSUs) and their sale.
This government came to power in 2014, under the axiom of “Minimum Government; Maximum Governance”, implying thereby that the remote control of Bhawans, Blocks and Buildings (3Bs) of Lutyens Delhi would be minimum. The public sector would be allowed to be board governed with little or no interference from the ministries neither by politicians nor bureaucrats; the emissaries of the politicians; except setting goals for deliverables.
However, there appears to be none of the above. On the contrary with control being exercised by the above, the public sector is being allowed to be decimated, reducing them to be worthless, declaring them as a drag on taxpayers’ money.
Public sector companies may not be innovative, transformative or agile which is a need to survive and be relevant in 21st century. But these companies have Brand equity, highly valued and prime immovable assets and operational setup which has a considerable value of taxpayers money and should not be disinvested for the pittance.
There are irresponsible statements like “if private sector, in the case of Airlines Traffic, can carry 86 per cent traffic, why can’t the remaining 14 per cent be carried by them”. In the case of BSNL, it is even worse at less than 10 per cent. Who has brought upon this dismal performance, the 3Bs. The question one begets is “Do Ambanis, Mittals or Birlas, ask the 3 Bs, No?”
There is also no denying the fact that the government must not be in the business of running businesses. It must be understood that the public sector was created at a time when no one was interested to venture into these Capital Intensive Industries, some for societal compulsions to serve the un-served in terms of geography and society.
They served the nation, but fell into disrepute, when they began to be treated as Jagirs or fiefdoms for political and other extraneous favours, resulting in bloated manpower, poor work culture, attitudinal issues, thus making them grossly inefficient for the quick-footed competition from a market-savvy private sector not kowtowed by the Bhawans and Blocks.
Mistakes of NDA 1
The case in question is Air India. I would like to insist that the government should not deviate from the basic principles of managing and selling PSUs even though it couldn’t find buyer for Air India.
Going by the track record of the previous NDA government, the assets by them were sold dirt cheap. No matter, what these assets were?
They sold, VSNL, Hindustan Zinc, IPCL, Hotels, HTL etc at Bargain Basement valuations for acquirers to make obscene amount of money by asset stripping by them.
All this happened because of poor valuations, unprofessional due diligence by Government agencies of their own assets; and at times appearing to be in collusion with prospective buyers. To top it all, the shareholder agreements were outright defective, resulting in the proceeds of asset stripping forming part of the balance sheet, with no provision to share either the proceed with shareholders or seeking their nod for selling assets.
The shareholders received a pittance of a dividend. Why I am saying this? Let us see a crown jewel disinvestment of VSNL in 2002. Tatas paid meagre around Rs 2,100 Crore, for about 45% of the company, but sold investments in satellite consortium at huge multiples along with sale of vast tracts of land in prime locations of the metropolitan cities.
Their selling spree fetched them anything between US$ 0.5 to 1.5 Billion. In recent times they sold a residential plot in Chennai on Mount Road opposite Taj hotel for a consideration of Rupees 195 Crore. There are many more such plots all over cities. It started within days of divestment, when Tatas wanted to siphon of some Rs 1,200 Crore of VSNL cash to Tata Teleservices to fund their Capital expenditure, ironically siphoning off after paying a meagre 2100 crore.
In 2005, Tatas decided to write off Rupees 965 crore from shareholder premium account to clean the balance sheet of a profit-making company, denying the government and other shareholders from receiving 2 bonus shares for each share held by them.
In addition, there are prime pieces of Residential Complexes, Land & Buildings at Mumbai, Delhi, Chennai, Kolkata, Bangalore, Jullundur, Ernakulum, Kanpur, Hyderabad, Dehradun, Pune etc which were never properly evaluated. 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.
By any reckoning, these assets can fetch around Rupees 5000 crore or more in addition to the Rs 7,000 crore under negotiations, in the case of VSNL.
Similarly, asset stripping happened in the case of Hindustan Zinc, IPCL and hotels like the two Centaurs at Bombay, Lodhi and Ranjit at Delhi, Ashok at Thiruvananthapuram, Udaipur, Bangalore and Manali among others.
The point to be noted is get out of the businesses, but get out properly without indulging in crony capitalism as was the case during NDA 1. Already, the likes of Indigo and Tatas must be salivating to grab Air India, Reliance and others to grab BSNL, not for any love for them but to sell family silver at huge multiples. Air India has prime assets.
Any asset can be valued in terms of perception, brand, financial strength, and growth prospect, relevance to the marketplace and peer comparisons. The PSUs get a beating in terms of 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 a proper inventory of all the businesses and assets to be properly valued confronting the buyers with sum of parts before divestment.
What NDA 2 should do?
Prima Facie, the question is can we change the past? No, but we can learn few lessons to avoid the pitfalls? Here are a few suggestions, steps and caveats to be observed. ……let’s start a debate on how PSU’s need to be disinvested so that government and public gets their due share:
Since these are public companies….it is important that involvement of all the parties during due diligence need to be there.
Due diligence and valuation process should be made transparent and public should have a say in providing their views before final decision and valuation for disinvestment takes place with a time-bound schedule so that it does not become a never-ending process. Involvement for disinvestment should have involvement from PSUs and their Unions, professional entities for fair and proper valuation.
Steps to follow
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. That in itself would be mind-bogglingly close to few billion Rupees (50 to 60) for both companies.
2. Get a sanity check of the valuation by a good Chartered Accountant or one of the top public sector or private Indian banks. ICICI Securities and SBI Capital would fill the bill. They must have M&A expertise. This would also provide a balance between Private and Public. Member (F) of DOT and a Secretary from MOF must have an oversight.
3. Set a benchmark of valuation of the company in totality or various parts of 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 planes, the landing rights, the real estate, maintenance centres, ground handling, etc. Arrive at valuation of each part and sum of all parts for a fair value and assessment. Never ever sell as one big ticket, like the NDA1.
4. To test the potential, either party sell shares, say 10 to 15 per cent to Financial Institutions or list them directly on to the stock market a la Reliance Comm in 2006 at Rupees 370 (today at 30).
5. Get them listed, allow trading to happen to settle any volatility. The listing would provide a benchmark. Post listing prepare for an IPO either offering fresh equity or off-loading existing equity in favour of investors, say around 10 to 15 per cent. Whatever approach is taken, assure investors of the use of proceeds, like downsizing, etc.
6. Post 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 family silver.
During this hiatus; restructures boards, downsize manpower, consider incentives like employee shareholding, compensation etc. Once this exercise is completed say in a total of 6 months, a benchmark price point would be available for any company to be divested.
Right timing for Selling PSUs
Why not practice what was mandated by public, Autonomy, Accountability, Audit; Hire & Fire, Rebuke, Reward ie Governance by Professional Independent Boards, after all the Mittals, Birlas, Tatas, Ambanis, Aggarwals, Jindals get on with business after acquiring licenses. To say that they are holy cows is also a travesty.
The government is bending backwards to bail them out after they have plundered public money from public sector banks, whether few lakh crore vis-a-vis 30,000 crore. The debt burden must not be the raison d’eter for divestment. Recovery of taxpayers money adequately following a well-thought-out process should be the objective, whether it takes six months or so is not the concern but doing it properly from the lessons learned from the past should be the priority.
Whatever, whichever, whenever do it astutely, smartly, before selling the family silver. They served when called to but understand that the Government destroyed them by over governance, indulgence, and treating them as personal fiefdom (of politicians). Of course, few pliable also fell for the bait for better afterlife. Having committed one mistake of over governance do not commit the blunder of excessive largesse as was done during your previous stint.
(The writer is former CMD of Videsh Sanchar Nigam Ltd. He has served as board of directors in leading global companies such as Inmarsat, Intelsat, ICO, Irridium, and Newskies.)