Scam accounts

The CAG's latest report indicts the NDA government's disinvestment exercise which resulted in grave losses to the exchequer.

V. SRIDHAR in Chennai

SCANDALS usually surface because of revelations by affected parties, concerned citizens or the media. However, the nature of the scandals surrounding disinvestment of government stake in public sector undertakings (PSUs), particularly during the National Democratic Alliance (NDA) government's tenure, is different. Each episode of the scam did not have to be "unearthed". And now the Comptroller and Auditor-General of India (CAG) confirms what has been public knowledge - that the government proceeded to disinvest with undue haste, ignoring warnings of grave losses to the exchequer. Ideological zeal perhaps explains this aggressive intent.

Soon after assuming office in 1999, the NDA government embarked on a full-scale privatisation programme, offering controlling stake in government-owned companies to "strategic partners". Starting in January 2000, in less than two and a half years, the government sold controlling stake in nine companies, apart from 19 hotels at various locations belonging to the India Tourism Development Corporation (ITDC). The government earned Rs.5,544 crores from the strategic sale of the nine enterprises. Every single instance was controversial and initiated protests from the unions. The unions not only feared for workers' jobs but alleged that the units were being sold for a song.

In Parliament, there were acrimonious debates in which even the Shiv Sena and the Telugu Desam Party (TDP), allies of the Bharatiya Janata Party (BJP), which led the NDA, were critical of the government's move. In fact, Prime Minister Manmohan Singh, participating in the debate on the privatisation of Bharat Aluminium Company Ltd. (Balco) as an Opposition member at that time, said: "This sort of privatisation and the instrument of divestment only leads to crony capitalism." He demanded, echoing the view of the Left, that a Joint Parliamentary Committee review the divestment. In fact, on every occasion when Parliament discussed the disinvestment of a PSU, there were protests that the move would result in serious losses to the exchequer.

The CAG's latest report only confirms these misgivings. It has pointed to serious shortcomings in the process. Its most significant finding is that the valuation of the companies' assets was done without "due seriousness". It also confirms the widespread belief that the valuation was done in a hurry. Valuers, it observes, were not given enough time to make a proper assessment of the core and non-core assets of the companies, particularly land. In several instances, the CAG found that substantial "surplus land" was sold along with the company when they were privatised. This bolsters the widespread suspicion that there is a "real estate" angle to the disinvestment controversy.

The cavalier manner in which the valuation was done is illustrated by the case of the disinvestment of Videsh Sanchar Nigam Ltd. (VSNL). Ten days before the submission of financial bids, the Department of Telecommunications (DoT), VSNL's parent department, informed the Finance Ministry that 773 acres (313 hectares) of the 1,230 acres (498 ha) of land in possession of VSNL was "surplus". The surplus land ought to have been alienated from the company before selling it off to the strategic partner. In fact, the value of the surplus land was not reckoned while determining the value of the enterprise.

The government appears to have been in such a hurry to privatise that it sold two units, the Modern Food Industries Ltd. (MFIL) and Balco, before it formulated guidelines for the valuation of enterprises and the appointment of advisers. The CAG also highlighted the fact that the bidding process suffered from serious shortcomings, which resulted in very few bids. In fact, the highest number of financial bids for any of the nine companies covered by the audit was three. In all, there were 96 expressions of interest received in response to the call for bids; but only 21 financial bids were filed.

The absence of a "clear accountability regime" meant that persons responsible for the lapses, particularly those relating to the valuation process, could not be held accountable. The CAG detected serious lapses in the government's contract with the global advisers for each instance of disinvestment. It has pointed out that the failure to make a "critical assessment of work done by the global advisers" resulted in their inability to "generate adequate competition in the bidding process". More shocking is the finding that in most cases the government signed a formal agreement with its global advisers after the company had been sold to the strategic partner. "The Global Adviser," it observes, "was thus left contractually unbound for the entire period." This, it says, "was not a good practice and did not provide assurance of professional handling of an important aspect of the process of disinvestment."

Moreover, the government had no mechanism to ensure that strategic partners actually delivered on their promises post-disinvestment. For instance, after disinvesting MFIL in favour of Hindustan Lever, the FMCG (fast moving consumer goods) subsidiary of the multinational company Unilever, the government had no means by which it could prevent the acquiring company from selling land in prime locations in the metros. Three of the nine companies analysed - MFIL, Hindustan Teleprinters Ltd. (HTL) and Paradeep Phosphates Ltd. (PPL) - turned sick soon after privatisation.

Initiated in 2001, Balco was the first "big ticket" disinvestment, and it remains controversial to this day. There were allegations that the assets of the company were undervalued grossly when the government sold it to Sterlite, which later came under the umbrella of Vedanta Resources, a London-based metals and mining company headed by Anil Agarwal.

The valuation of the company's assets, including the sprawling township, plant and machinery, and a 270-MW power plant in Korba, Chhattisgarh, was completed in 19 days, indicating the zeal with which the deal was struck.

The CAG comments that in its opinion a proper evaluation would have required at least 45 days. The winning bid of Rs.551.50 crores, for 51 per cent of the company, was perceived widely to be way below a fair valuation of the company's assets (Frontline, March 30, 2001). The CAG's latest report confirms the suspicion that there were serious shortcomings in the valuation.

On the eve of its takeover by Sterlite, Balco had increased its annual manufacturing capacity for finished products from 91,000 tonnes to 131,400 tonnes. However, the audit found that the valuer had "completely ignored the capacity addition in the pipeline".

The audit noticed the absence of a business plan in three cases: VSNL, Indian Petrochemicals Ltd. (IPCL) and Hindustan Zinc Ltd. (HZL). Considering the fact that this was a vital input in the valuation of the future earning potential of the companies being sold, the CAG observes that this "seriously hindered the reliability of the valuation". Moreover, the lack of a business plan, generated from within the PSU concerned, would have provided a benchmark value.

The CAG found serious anomalies in the valuation of HZL's core assets. It observes that the global adviser's (BNP Paribas Equities India Private Ltd.) own projections of HZL's future earnings "were not indicated in the valuation report". The adviser also used higher rates of taxes applicable on its products, which resulted in lower estimates of revenues and, therefore, "had the effect of lowering the enterprise value". Most shockingly, in response to the audit team's queries in May 2006, the Finance Ministry said that the global adviser had ceased operations in 2002, soon after HZL was sold to Sterlite. Even more shocking is the CAG's finding that the Ministry itself "had not kept any record of the assumptions behind the valuation exercise carried out by Global Adviser though these affected the business valuation". Moreover, the CAG observes that there were inconsistencies in the valuation of HZL's mines, which are among its main assets. The valuer assumed wrongly that only one of the company's six mines was operational. The CAG report observes that the Finance Ministry was completely oblivious to this until it was "pointed out in the audit" in May 2006.

For Arun Shourie, former Union Minister in charge of the Department of Disinvestment in the Finance Ministry, this is the second indictment by the CAG for failure to avoid losses while disposing of public assets. Last year, the CAG passed severe strictures against the Department of Disinvestment for the manner in which it handled disinvestment in two five-star hotels, Airport Centaur and Juhu Centaur, belonging to the Hotel Corporation of India (Frontline, June 3, 2005).

In his response to the CAG's latest strictures, Shourie, considered by most people as an ardent advocate of privatisation, said that the CAG had taken a "very narrow-view auditor's perspective" and was making "impractical" recommendations. He said that disinvestment had proceeded against heavy odds and that "armchair critics" would always be critical of whatever methods were adopted in the face of these odds.

Dipankar Mukherjee, Centre of Indian Trade Unions (CITU) secretary who as a Member of Parliament had participated in the parliamentary debates on several of the disinvestments, told Frontline that questions about the "competence of the valuers had been repeatedly raised by critics of the NDA". He pointed out that "changing the specifications for the valuation of the bids" had in effect "changed goalposts". Moreover, the limited number of bids indicated "collusive bidding". He alleged that the NDA government ignored all these and proceeded to privatise these companies in the full knowledge that what it was doing was wrong. "It has taken five years for the CAG to tell us what we already know."

It is significant that the disinvestment scam engages the attention of the media far less than, for instance, the oil-for-food "scam" which has consumed the political career of former External Affairs Minister Natwar Singh. Dipankar Mukherjee pointed out that the amount of money involved in the Indian leg of the Volcker scam was a mere Rs.45 lakhs compared to the thousands of crores in the disinvestment scandal; and, in any case, it was not even Indian money that was supposed to have been swindled in Volcker scam.

In his book Globalisation and its Discontents, Nobel laureate Joseph Stiglitz calls privatisation of state assets "briberization", which essentially facilitates "rent-seeking". The point is not whether the disinvestment happened the way it did because Shourie or other politicians were corrupt. The point is that the political establishment of the time was so zealous in its pursuit of privatisation that it could not countenance any checks and balances. In short, the disinvestment agenda was ideology-driven, what crit<147,4,1>ics would term market fundamentalism. Of course, even if politicians themselves may not have been corrupt, the lack of fair valuation and the hurry in which the disinvestment juggernaut was rolled out gave scope for racketeers to make a killing if they could use the loopholes created for their benefit by the ideology-driven moves.

Dipankar Mukherjee alleged that the "big players" used the "ideology-driven disinvestment moves" of the NDA government "to corner these companies at a throwaway price". He said: "A nexus among politicians, bureaucrats and industrialists facilitated this." He also said that the Central Bureau of Investigation (CBI) inquiry into the Centaur Hotels issue had "not progressed at all".

The government has been forced to take cognisance of the CAG report. It announced that it had returned a cheque for Rs.1,098 crores to Sterlite, which was the price for the remaining 49 per cent of the government's stake in Balco (see box).

However, in a letter to the Prime Minister, Communist Party of India (Marxist) Member of Parliament Chittabrata Majumdar pointed out that the CAG's mandate was to audit transactions, "not investigate corruption". He noted out that following the CAG's strictures on the disinvestment of Centaur Hotels, the government had referred the matter to the CBI. The latest report indicated lapses of a similar nature, involving "undervaluation and lack of competitive bidding", and these too were fit cases for investigation by the CBI, he argued.