VSNL Disinvestment: Scam in the Making

THE BALCO disinvestment fiasco – handing over a highly profitable strategic industry to Sterlite, deeply implicated in Harshad Mehta’s stock market scam – has taught nothing to the Vajpayee government. The current disinvestment plans on the anvil for profitable Public Sector Units (PSUs) continue with equally scam tainted partners. The Videsh Sanchar Nigam Ltd (VSNL) disinvestment scheme is another one in this long line of scams that the Vajpayee government is pursuing.

The Government of India owns today about 53 per cent (52.97 per cent to be exact) of VSNL shares, the rest has already been disinvested to small investors through the stock market. VSNL has a monopoly of all international long distance services, which will now terminate in March 2002 and not March 2004, as was originally slated under India’s WTO obligations. The date was advanced essentially to satisfy global international carriers such as AT&T, who have been clamouring for a share of the lucrative Indian market. VSNL is also the leading Internet service provider in the country with more than half a million subscribers.

VSNL is a cash rich company. It has cash reserves and surplus of more than Rs 6,000 crore (year ending March 2000) and made a profit of over Rs 800 crore for that year. The government proposes to disinvest 25 per cent of the shares to a “strategic” partner who will be given complete control of the company.

SPURIOUS ARGUMENTS

Why is there a need to hand over a company that is doing well and making profits of over Rs 800 crore per year on a paid up capital of Rs 285 crore? The three arguments given in favour of disinvestment have been that private capital is required in PSUs for (i) infusing new capital (ii) new technology and (iii) revamp and introduce new management. None of them apply to VSNL. VSNL is not only cash-rich, its bankability – ability to raise capital from financial institutions — is already very high. With cash reserves of over Rs 6,000 crore and its excellent credit rating, it will have no problem of raising capital either through loans or through the share market route. Technology in any case is never the province of a service provider and this is manifest from the list of companies that are showing interest in VSNL. In this business, the manufactures — those that provide the equipment – are different from the service providers. The service providers such as VSNL buy consultancy services and equipment from the market. This is what VSNL has been doing to provide the current level of service and this is being continuously upgraded. The last argument is equally inapplicable to VSNL. By all accounts, even in the competitive Internet business, it has been ahead of the private pack, even though government has allowed it an all India license only recently; earlier it was restricted to only six cities unlike the private players who were given All India license much earlier.

If the arguments for disinvestment are spurious on the above three counts, what other reasons can the government advance regarding VSNL disinvestment? One of the commonly heard one is that the government has no business remaining in telecom: it should withdraw from this sector totally and allow it to be run by private capital. Obviously, this has little to do with any economic justification for disinvestment: it is an ideological prescription, pure and simple.

NATIONAL INTEREST IGNORED

Such an ideological stand misses out completely on why the government entered the communications sector in the first place. Telecommunications have always been held to be a “strategic” sector and even today, a number of countries including the United States do not allow foreign ownership of communication companies. A number of naïve analysts now contend that such a view of communication is out of step with the current globalised world. These analysts need to learn some simple facts of life. The communication intelligence (comint) part of the US intelligence, maintains an infrastructure known as Echelon, whose task is to monitor all communications. Computerised analysis using trigger words allows sifting of this enormous amount of data and focus on calls that could be of interest to the US. These are then analysed by human analysts. The US routinely monitors all communications regarding negotiating positions of the delegations to international treaties and trade agreements, nuclear related issues, and so on. These are not idle speculations – they have been confirmed by documents accessed through the Freedom of Information Act in the US. The only denial that the US makes is that such information is used for commercial purposes to help US firms – a charge that is currently being investigated by European Union.

Why is the Indian government so callous of its own strategic interests? It has raised the limit of foreign capital to 74 per cent in telecom companies from the earlier one of 49 per cent. Now by handing over VSNL to private capital, it can pass on to foreign hands. It is again well known that American companies help the US in its electronic eavesdropping. It appears that the need to please the global number one — the US – is drowning all good sense the government has. Or are their more sinister players whose object is to tie Indian permanently to the apron strings of the US?

If the decision to disinvest in VSNL is inexplicable, both in business terms and in the nation interest, why is VSNL being disinvested? The answer lies in the two-pronged strategy that the BJP government is following. One is to hand over to private capital large chunks of profitable PSUs to meet the growing budget deficit. After all, the tax concessions continuously being given to the rich and the wealthy have consequences for the government’s finances. The second is that there is much more money today to be made by selling government’s assets cheaply than by pursuing development.

While some may dispute selling the family silver to pay the grocers bill is not a good way to run the household economy, few will disagree that at least we must be paid in full for the precious family silver. Yet, in case after case, we find the process of disinvestment is mired in scams. The BALCO disinvestment is too fresh in peoples’ minds. It is now clear that what Sterlite have paid is a fraction of the true cost of BALCO. In any case, Sterlite is now barred from accessing the capital market – one of the main reasons given for disinvesting in BALCO. The case of Modern Foods, the other disinvestment of the BJP government, is also now unravelling. It is now admitted that the government “forgot” in its valuation to value the land and prime property that Modern Foods owned. Hindustan Lever is now trying to capitalise on the high market value of land and property. In one year they have driven Modern Foods into a 90 crore loss and have taken it to BIFR. The next step is to convert industrial land to commercial property and make a killing on real estate.

DEFIES BUSINESS SENSE

The VSNL case is no different. The company has a market capitalisation today of about Rs 10,000 crore However, as we all know, the share market has yet to recover from Ketan Parekh’s share market scam and is very depressed. Taking VSNL’s assets including land and property, cash reserves and profits, the minimum market price of all VSNL’s shares will be Rs 20,000 crore. If we consider the price of VSNL shares on this basis alone, the price of 25 per cent shares will amount to Rs 5,000 crore. However, if we are to also hand over the management of a company that has more than Rs 6,000 crore as cash reserves to the 25 per cent owner, a suitable premium has to be a considered over and above this share price. Otherwise, the new management can drain-off the reserves to finance their acquisition of VSNL!

The decisions of the government – handing over a company to a “strategic partner” for only 25 per cent of its value – makes very little business sense. If the 25 per cent partner brings in technology which otherwise cannot be accessed, one can even concede some logic to the decision. However, handing over control for a 25 per cent stake in VSNL defies all business sense. Once control has been handed over, the new partner needs to pick up another 5 to 10 per cent from the market. Once the strategic partner owns 30-35 per cent of the shares of VSNL, the government’s stake is worthless – it can do very little even if VSNL is sucked dry and rundown to the ground. The only explanation for this strange decision is that it makes the task of handing over VSNL to “friends” easier: they will have to pay a much lower price than the market dictates.

TAINT OF SCAM

The lack of transparency and the taint of scam are evident also in the consultants chosen for VSNL disinvestment. VSNL’s key disinvestment advisor, as is announced on their web site, is Credit Suisse First Boston, an international finance company and a brokerage house. Credit Suisse has recently been banned by SEBI, along with Ketan Parekh, from any further stock market transactions in India. In its 22-page order, SEBI has clearly brought out the Ketan Parekh-Credit Suisse nexus. If the earlier strategic partner for the government in BALCO was Sterlite of the infamous Harshad Mehta led stock market scam, now their advisors are the current market scamsters. If this were not enough, no basis for valuation of VSNL shares has been made public and no clearly defined methodology has yet been identified for its disinvestment. The entire exercise is shrouded in secrecy; we are back to the case-by-case policy made famous earlier and presumably, the suitcase people are again active. In other words, crony capitalism is the name of the game.

If the 25 per cent partner brings in technology which otherwise cannot be accessed, one can even concede some logic to the decision. However, handing over control for a 25 per cent stake in VSNL defies all business sense. Once control has been handed over, the new partner needs to pick up another 5 to 10 per cent from the market. Once the strategic partner owns 30-35 per cent of the shares of VSNL, the government’s stake is worthless – it can do very little even if VSNL is sucked dry and rundown to the ground.