A question of timing

In the case of Air-India and VSNL, it looks like a case of changing the guard while displaying the silver.

CONTROVERSY dogs the National Democratic Alliance (NDA) government's effort to settle into disinvestment overdrive. With the strategic sale of public sector giants such as Videsh Sanchar Nigam Limited (VSNL), Air-India and Indian Airlines imminent, the Congress(I), led by former Finance Minister Dr. Manmohan Singh, has decided to join the opposition to the move. Dr. Manmohan Singh was reported to have told the press in Bangalore that "the BJP is trying to sell Air-India for a song".

There were two grounds that he provided in defence of that judgment. First, the government's decision to suspend the managing director of the airline, Michael Mascarenhas, at this crucial juncture, based on charges of having provided its general sales agent (GSA) in London unusually lucrative terms (Frontline, June 22, 2001). Second, the fact that in the run-up to the disinvestment drive, the government had chosen to "hawk" bilateral landing rights to other foreign airlines which, while improving the airline's bottomline temporarily, undermines the value of its stock.

The first of these arguments is of more substance than appears at first sight, since Air-India's is not the only instance where the government has forced a change of guard on the eve of carrying out disinvestment. Recently, Amitabh Kumar, who headed VSNL, was also shown the door on charges of corruption on the eve of its privatisation. To make this charge is not to dismiss the allegations of irregularities against these two high-profile, senior executives, but to question the timing of the decision to press charges and force their exit.

Consider the charges against Mascarenhas. Two of these have been highlighted. The first that during his tenure, Welcome Travels, the GSA in the United Kingdom, was shown undue favours and provided with irregular performance-linked incentives (PLIs) that cost Air-India a substantial sum. A recent report by the Comptroller and Auditor-General, analysing such incentive payments during the period 1987-2000, held these to be irregular and noted that while a commercial organisation may adopt dynamic and flexible modules of decision-making in order to further its commercial interests, the organisation would end up a loser if these modules are adopted to shower "selective favours". A subsequent investigation by the Chief Vigilance Officer (CVO) of the airline corroborated the findings and ostensibly pinpointed responsibility. These findings provided the basis for the suspension of Mascarenhas and another senior executive of Air-India.

However, the 'irregular' PLIs have allegedly been made over an extended period, starting 1992-93. Can Mascarenhas, who has been the chief executive of the airline for a brief part of this period, be held responsible for all of the irregularities, or was he carrying forward a practice that had been established earlier? The argument being used by the Ministry is that several officers, including Mascarenhas and P.K. Sinha, were in crucial posts both in 1992-93 and 1997-98 when changes in the PLI payments for the London GSA were decided upon.

This, however, leaves unanswered the question why such charges were not investigated earlier. More crucially, the suspension orders were served on Mascarenhas on May 23, even though the report of the CVO had been received in October 2000. According to reports, the Ministry formally wrote to the Central Bureau of Investigation (CBI) to launch a probe into the alleged irregularities only on May 22. What is more, precisely at a time when action was possibly being contemplated, another case of irregularity against Mascarenhas was raked up. This relates to a decision to wet-lease aircraft, or contract to lease on terms which involved the use of and payment to crew too, from Caribjet. Ostensibly such an arrangement is far less commercially acceptable than a dry lease. Initially, Air-India had taken two Airbus A310 aircraft on wet lease from Caribjet for a year in 1994. Subsequently, Air-India also wet-leased two L1011 aircraft and a A310 for a period of two years. The agreement, however, had to be terminated since it was found to be commercially unviable. However, since there was no exit clause in the agreement, Air-India had to pay compensation to Caribjet to the extent of Rs.107.52 crores.

The Caribjet case was first referred to the CBI on February 11 last year, and is currently under investigation, but the CBI has not reported its findings to the Ministry yet. But the fact that it has been the focus of media attention at this juncture fuels suspicion that Mascarenhas is being specially targeted.

Overall, given this history, it is not out of place for Dr. Manmohan Singh to make an issue of the sudden decision to nail Mascarenhas at this crucial juncture. If he had not been proceeded against earlier, holding out till the disinvestment process had been completed would have helped the government avoid the allegation that it is sullying the corporation's image on the eve of the process.

A SIMILAR allegation can be made in the case of VSNL where its high-profile Director (Operations), Amitabh Kumar, who also acted as Managing Director during a crucial phase of VSNL's history, has been forced to put in his papers. Kumar was served a charge-sheet at the end of May, on the basis of recommendations from the Central Vigilance Commissioner. Amitabh Kumar was quick to respond with a statement: "The allegations are baseless and appear to have been motivated." He said they were on account of "internal rivalry within VSNL as well as external pressure from vested interests who want to bring down the value of the company during the critical period in the run-up to the company's disinvestment."

Here again the issue relates not to the merits of the case, which the investigation must decide. Rather, it relates to the timing. Amitabh Kumar was given unusual powers during a time when VSNL had been restructuring its operations in keeping with decisions being implemented as part of the government's ever-changing telecom policy. Even after the appointment of a Managing Director to the corporation that had remained formally headless for a long period of time, Kumar's presence and influence was obvious. The fact that the government gave him the importance it did, and then decided to force his exit at a critical juncture, is bound to raise questions.

All this matters because the crucial question is how the government is likely to value these corporations when assessing the bids made by those seeking a "strategic stake", or full control in lieu of a small share in equity, in them. Further, it is not just how that stake is valued that is at issue, but the way the shareholders' agreement, which would define the powers of the strategic investor, is drafted.

It is not clear how these would be affected by the recent actions against Mascarenhas, Amitabh Kumar and others. Rumour has it that V.N. Verma, who was displaced by Mascarenhas from his position as Commercial Director, Air-India, and has been reinstated in the wake of the latter's suspension, had views that were "anti-disinvestment" and in keeping with those held by Civil Aviation Minister Sharad Yadav. But Mascarenhas himself claims that the government's decision to sign a number of bilateral deals granting reciprocal landing rights and hawking Air-India's unutilised rights to earn revenues, rather than leasing aircraft to use those rights, was a way of undermining Air-India's share value.

The decision to enter into codeshare, block space and pool arrangements and other commercial agreements reportedly yielded Air-India Rs.257 crores in 2000-01. But this temporary gain in revenues is also a reflection of the failure of the airline to exploit rights which others find lucrative enough to buy in exchange for a significant sum of money. This gain or loss, depending on how one looks at it, is accompanied by the growing presence of other airlines in what was substantially Air-India's territory. Thus, the policy, which serves as a soft option in lieu of investments that would enhance the airline's profitable assets, does adversely affect the long-run earnings profile of the organisation. The net impact on the corporation's value may indeed be negative, as Dr. Manmohan Singh suggests.

Similar suspicions with regard to how government actions affect share valuation prevailing in the case of VSNL, where the issue is even more complex. The premature termination of VSNL's international telephony monopoly next year is expected to affect adversely the corporation's value, even though it is to be compensated in cash as well as by means of concessions regarding payment of entry fee and provision of bank guarantee for entry into long distance telephony. The decision on what should be done with the Rs.4,000-odd crore cash surplus that the company has accumulated because it has not invested fast enough, would definitely make a difference. And the mess surrounding Amitabh Kumar's forced and ill-timed exit may also, in myriad ways, have its effect.

THERE are three ways in which the issue of valuation is approached by the government. In instances like that of VSNL, the prevailing price of previously disinvested shares provides some benchmark. The incomes being earned by the company, which are extrapolated and discounted, provide a second yardstick, as happened in the case of Balco. And finally, an independent valuation of the worth of the tangible and intangible assets of the company ostensibly provides a third indicator.

The problem is that the shallow and volatile nature of the stock market makes the first a completely useless guide. The second has been undermined by the government's refusal to allow these firms to exploit the opportunities they had of earning long-run profits, partly because of bureaucratisation and disputes over turf, and partly on the grounds that they were candidates for disinvestment. The likely value yielded by the third has been undermined in various ways, as the current controversy, and that surrounding Balco earlier, suggests.

There are many factors favouring Dr. Manmohan Singh in the current controversy. He has an image of a person who, besides being 'clean' himself , would not publicly defend the corrupt. He is no opponent of liberalisation and disinvestment, having launched India's accelerated 'reform' programme of the 1990s. He has the training and experience to judge issues of the kind that are under debate. Hence his opposition to the manner in which disinvestment is being pursued is likely to carry much weight. Further, since it signals the decision of the Congress(I) to oppose, at least in part, the irrational disinvestment drive launched by the NDA, it is likely to be effective.

Yet, what is good can be made better. How much better it would be if he combined this opposition with a campaign to restructure these potentially lucrative corporations, retain them in the public sector and make them yield much-needed non-tax revenues for the state. Just stalling the pace of disinvestment or merely influencing the price at which it occurs would hardly win the battle.