A step towards privatisation

A Biju Janata Dal demonstration outside Nalco's corporate office in Bhubaneswar on June 26. -

The government's decision to sell 10 per cent of its stake in Nalco meets with stiff resistance in Orissa.

THERE is something eerie about the way public assets are privatised. Announcements of impending privatisation of publicly owned companies usually come without warning. The objective appears to be more to catch the public by surprise than to carry out a transparent or logical exercise. The recent decision of the Union government to sell 10 per cent of its equity in National Aluminium Company Ltd. (Nalco), and the fierce resistance it has met with, highlights why privatisation has been controversial in India.

On June 22, the Cabinet Committee on Economic Affairs (CCEA) announced the decision to divest 10 per cent of the government's stake each in Nalco and the Neyveli Lignite Corporation (NLC). The sale would result in government equity in Nalco falling to 77.15 per cent.

The reactions of the governments of the two States where the companies are headquartered were swift. Orissa Chief Minister Naveen Patnaik wrote to the Prime Minister asking him to review the decision. His party, the Biju Janata Dal (BJD), launched an agitation in the State. The reaction of Tamil Nadu Chief Minister M. Karunanidhi was more muted. He too sought a review of the decision; but unlike in Orissa, protests were mostly confined to Neyveli.

Four years ago, the National Democratic Alliance (NDA) government attempted to sell Nalco to a "strategic partner". This was met with fierce resistance in Orissa. Angry workers prevented representatives of private companies from inspecting the company's assets. The remarkably united response from not only the trade unions but also parties across the political spectrum forced the government to abandon the move.

It was obvious that the government did not expect the float to go smoothly. Union Finance Minister P. Chidambaram, who announced the CCEA's decision, said, "We are not going to hurry these disinvestments." He hinted that the process might take five or six months and said the government would wait "for the right market conditions". Acutely aware of the resistance that the move would evoke from the Left, Chidambaram gave the impression that the government had no timeframe in mind. He also tried to allay fears that the planned disinvestment was a means of cushioning the government's fisc. "The fiscal year is completely delinked from disinvestments," he said.

The proceeds of the sale of 6.4 crore Nalco shares would go to the National Investment Fund (NIF), which will be managed, by the Life Insurance Corporation (LIC), the State Bank of India (SBI) and the Unit Trust of India (SBI).

Chidambaram claimed that the CCEA's decision was in continuance of its earlier decision to divest small portions of equity in non-Navaratna public sector units (PSUs) and in line with the National Common Minimum Programme. It was also in consonance with, he claimed, the consensus arrived at the Left-United Progressive Alliance coordination committee meeting on November 21, 2005, to mobilise resources for the NIF. Chidambaram said that the two companies "will very much remain PSUs" because the overwhelming majority of shares would still be owned by the government.

Chidambaram said the proceeds from Nalco and NLC divestments would go to the NIF. While 75 per cent of the returns earned by the NIF would be spent on social sector programmes, the remaining would be spent on revival of viable PSUs. Earlier, the government had decided to divest a small portion of equity in non-Navaratna PSUs. It had cleared the sale of 10 per cent stake each in the Power Finance Corporation and the National Mineral Development Corporation.

The Finance Ministry, which calls the shots in all matters related to disinvestment in public enterprises, had its way this time too. The Union Ministry for Steel and Mines, which had proposed that the proceeds of the disinvestment in Nalco be ploughed back into the company, was forced to bow to the Finance Ministry's diktat. A few days before the CCEA meeting, Union Minister for Mines Sis Ram Ola said, "We are against disinvestment of profit-making PSUs under the Mines Ministry, and Nalco has been doing reasonably well. However, we have agreed to the Finance Ministry's proposal to offload 10 per cent stake in the PSU, but money accrued from the disinvestment should be re-invested in Nalco."

The Left reacted swiftly to the move. Sitaram Yechury, a Polit Bureau member of the Communist Party of India (Marxist), denied that the Left parties had agreed to the disinvestment proposal in the recent Left-UPA coordination committee meeting. It may be recalled that the government's move to sell a minority stake in Bharat Heavy Electricals Ltd. (BHEL) last year had resulted in the Left walking out of the coordination committee.

In Orissa, Nalco employees struck work at the three main bases of the company. And in Delhi, the central trade unions attacked the move strongly. Dipankar Mukherjee, secretary, Centre of Indian Trade Unions (CITU), said that the disinvestment move could be used by Nalco's competitors to gain entry into the company. This is not without significance. The last round of disinvestment, which resulted in the sale of 12.85 per cent of the company's equity, had resulted in Hindalco acquiring 1.15 per cent of the company's equity capital. Moreover, Foreign Institutional Investors (FIIs) had acquired almost 3 per cent of the equity capital.

Dipankar Mukherjee also pointed out that Chidambaram had earlier served on the board of the Vedanta Group, which controls Sterlite. It may be recalled that in 2001, during the National Democratic Alliance (NDA) regime, Sterlite had acquired control of Balco, creating a controversy that still remains alive (Frontline, May 11, 2001). Dipankar Mukherjee told Frontline that "Chidambaram ought to have followed the healthy precedent he had set for himself by recusing himself from the discussions which resulted in the settlement to the Dabhol dispute". Chidambaram, it may be recalled, did this because he had earlier tendered legal advice to the company in his capacity as a lawyer (he was not a Minister then). He also said that Nalco, which had performed admirably, ought to be a Navaratna, a status that would give it greater autonomy.

What is wrong with selling a minority stake to the public? After all, this will not alter the public character of the company. This apparently innocent line of reasoning ignores the environment in which Nalco actually exists. The aluminium industry in India is oligopolistic in nature. There are three main players, Nalco being the only countervailing force to the other two - Hindalco, which is part of the Aditya Birla group, and the Vedanta group. Both companies have demonstrated their eagerness to acquire companies to enhance market shares. They have also shown their eagerness to acquire Nalco if and when it is placed on the block.

It is obvious that the government's controlling stake in Nalco, in this situation, actually enables it to moderate happenings in this sector, which was declared as a "core sector" by the Disinvestment Commission in 1998. In fact, the Commission had commended Nalco for its "strong business and financial position".

Nalco's stellar performance raises more questions about the government's motives. Why would the government want to dilute its stake in a company that gives it fairly good returns? Between 2000-01 and 2005-06, the company's sales have more than doubled; gross profits have almost trebled. Moreover, the government has earned almost Rs.1,500 crores as dividend from the company in the last six years. The sale of 6.4 crore shares at the current market price (Rs. 222 a share on June 29) will fetch the government Rs.1,429 crores. Letting the stock market set the value of the stake is obviously risky, and sure to generate controversy. A month ago, before the market crashed, the Nalco share was trading at Rs.335. At that price, the government's 10 per cent stake would have been valued at Rs.2,157 crores, suggesting a notional loss of Rs.728 crores if the stake is sold at the current price. The wide range in values in the space of a few weeks only indicates just how hazardous - and controversial - the process of valuation can be.

Nalco has undertaken significant expansion in capacity in the last few years. Phase I of the expansion programme, which was completed in 2004, was undertaken at a cost of Rs.3,700 crores. The second phase, which commenced soon after, is set to cost the company Rs.4,091 crores by the time it is completed in 2008. None of this will cost the government, the principal shareholder, anything; Nalco has stopped drawing anything from the Union Budget for a long time. However, the sale of equity in a growing company raises several questions. How can the company's intrinsic value be computed when it is regularly ploughing profits for expansion in the future? Nalco, it ought to be emphasised, is a zero-debt company with reserves of more than Rs.4,000 crores. It also raises questions about the fiduciary responsibility of the government vis-a-vis the company. Why should a company invest in expansion when it is anyway going to be sold - in part or full - to private entities? The argument that Nalco's future is intact because only a minority stake is being sold dodges even more questions. The dividend that the government earns from the company - at least Rs.225 crores annually in the last six years - does not justify the proposed sale.

It is not difficult to understand why the protests have been spontaneous and passionate in Orissa, a resource-rich but industrially backward and poor State. Shivaji Patnaik, the veteran CITU leader who heads the federation of trade unions in Nalco, said that the fight to save Nalco has caught the popular imagination because the company is one of its kind in the State. Nalco is the only publicly owned integrated aluminium producer. More important, its entire operation - from mining bauxite to smelting ore to finished aluminium production - is done within the State. The spin-offs are substantial, especially when seen in the context of the fact that most private industries mine ore and take it out of Orissa, depriving the State of value addition and the prospect of employment generation. No wonder the move is often characterised as an assault on Oriya pride. This explains the posture of strident opposition that the BJD has adopted.

It is obvious that the UPA government is testing the already troubled waters in Orissa. And, if the past is any guide, the resistance will be swift and passionate.