Ringing questions

A look-back at the rights and wrongs concerning the Tata-controlled VSNL's acquisition of a stake in Tata Tele Services Limited, and the larger issues it poses regarding the ongoing disinvestment process.

CONTROVERSY continues to dog the Union government's disinvestment programme. And, ensnared in it are some of India's leading corporate entities. The latest involves the Tatas, one of the country's oldest and biggest business groups, which in February acquired Videsh Sanchar Nigam Limited (VSNL), one of the public sector crown jewels. The controversy erupted as soon as the Tatas announced in late May that VSNL would invest Rs.1,200 crores in one of its own group companies in the basic telephony sector, Tata Tele Services Ltd (TTSL). The Union Cabinet was divided, amid speculation that it was but a reflection of an ongoing corporate tussle over how the Indian telecommunications pie was to be divided among private corporate entities.

The principal protagonists in the Cabinet were Minister for Communications and Information Technology Pramod Mahajan and Minister for Disinvestment Arun Shourie. Home Minister L.K. Advani played the role of mediator in the drama that also involved several top Bharatiya Janata Party functionaries. Among them were party president Jana Krishnamurthy, convener of the party's economic affairs cell Jagdish Shettigar, and high-profile BJP Member of Parliament Kirit Somaiya, who takes a keen interest in corporate affairs and heads the Investor Grievance Forum. After prolonged negotiations, Pramod Mahajan made peace with the Tatas on June 10. The Tatas announced that they would go ahead with the planned investment of VSNL funds in TTSL, amid growing unease that the issues that Mahajan had raised, citing the public interest, remained largely unresolved. The only concession made by the company was its acceptance of a government nominee in the committee to monitor VSNL's investments in TTSL.

Soon after the Tatas' announcement, Mahajan responded with the charge that the group was indulging in "asset stripping". He alleged that the move violated the spirit of the deal that the Tatas had struck with the government when the former handed over its 25 per cent stake in VSNL to the Tatas as a "strategic partner". Mahajan claimed that the VSNL board's decision was made in haste and that due processes were not followed. Officials in the Department of Telecommunications (DoT) wrote to VSNL claiming that the government nominees on the board were not informed in advance about the agenda of the May 28 meeting of the VSNL board that took the decision. Moreover, they demanded that "more detailed deliberations" by a special committee were needed, including a proviso that a government nominee be made a member of the committee. Mahajan threatened to move the Company Law Board citing infringement of minority shareholders' rights.

ON May 28, the VSNL board decided to invest up to Rs.1,200 crores in the share capital of TTSL. The group claimed that the "strategic investment will be in tune with the company's initiative to reach out to the end-customers". The Tatas claimed that the move would enable VSNL, which did not have any end-customers in the basic telephony segment, to establish "forward integration". TTSL, which currently operates only in the Andhra Pradesh circle, plans to launch services in the Delhi circle later this year and in several other circles. In February, when the Tatas gained control of VSNL from the government, the group said that VSNL would play a major role in the group's "holistic telecom strategy". The Tata group said that the stake would provide an ideal opportunity for it to integrate seamlessly its basic and cellular services utilising VSNL's presence in international long-distance telephony and Internet services. The "holistic strategy" was what led to the formation of the Batata combine in 2001, involving the merger of the cellular services of the Birla, Tata and AT&T groups, and now renamed Idea Cellular. TTSL also plans to enter the Delhi and Maharashtra circles, and Mumbai, where it would compete with Mahanagar Telecom Nigam Limited (MTNL) and Bharat Sanchar Nigam Limited (BSNL). It plans to enter the Gujarat, Tamil Nadu and Karnataka circles. TTSL plans to acquire licences for basic services in circles such as Kerala, Punjab and Haryana.

The Rs.1,200-crore investment made by VSNL, over a period of four years, would amount to VSNL taking a 25 per cent stake in TTSL, which has raised further controversy. There have been allegations that the valuation of the proposed stake is too high. Critics have pointed out the fact that the Tatas themselves got the controlling "strategic stake" of 25 per cent in VSNL at a price of Rs.202 a share or a total of Rs.1,439 crores. They have objected to the fact that VSNL is making an almost similar investment in terms of magnitude, for a comparable stake, in TTSL, a fledgling company whose scale of operations and earnings are in no way comparable to those of the giant that VSNL is. TTSL, being a closely held company of the Tata group, is not required to meet the same disclosure norms that would apply to public limited companies.

However, some analysts have challenged the Tatas by comparing the VSNL valuation of the TTSL stake to other companies such as Bharti Telecom which are in the same line of business. Bharti, whose services are operational in several telecommunication circles, and is generally regarded as being ahead of the Tatas in terms of rolling out their network, is valued in the bourses (in terms of market capitalisation) at about Rs.4,500 crores. Hence analysts have suggested that the valuation of the 25 per cent VSNL stake in TTSL is far too high.

Pramod Mahajan was quick to object to the investment. Mahajan said that the two government nominees would be issued show-cause notices to explain their conduct at the meeting of the VSNL board. Officials in Mahajan's Ministry said that the Tatas had not sought DoT approval to transfer resources from VSNL to other entities in its group. One official said: "The Tatas have no right to transfer resources from VSNL to any of their group companies without seeking permission from DoT."

Critics pointed out that the move would result in the transfer of Rs.1,200 crores from a company in which the Tata group has a 45 per cent stake (that is, VSNL) to a much smaller, closely-held company within the same group. It was pointed out that since VSNL also has surplus land, the Tatas could recoup their investment in VSNL without in any way contributing to improvement in VSNL's performance. Even hardcore supporters of the disinvestment programme, who claim that privatisation is all about improved performance in the hands of skilled private entrepreneurial managements, were aghast at the way the investment was planned. There were also fears that Mahajan's reaction was not so much an intervention in public interest as it was a manoeuvre in a turf war involving another large corporate entity with its own plans to dominate the telecommunication network, which is still predominantly owned by public sector entities. However, such fears were balanced by the fact that the government, as the single largest shareholder after the Tatas (owning 26 per cent of VSNL), was required to act in the public interest.

At VSNL's last annual general meeting the company announced several initiatives. Among them were the foray into national long-distance and direct-to-home services and exploring possibilities in the international market. Significantly, at that time the company had no plans to move into domestic basic telecommunication services. The Tatas' suggestion that VSNL's acquisition of a stake in TTSL is vital in order to enable it to plug into a captive market of end-users of basic telephony services, which VSNL lacks at present, has also been dismissed by critics. They point to the fact that TTSL is itself a fledgling company with hardly a significant subscriber base for basic services. As the controversy simmered, DoT officials argued that the proposed investment made "unsound business sense". They said that the Tatas' case rested on the assumption that TTSL's "captive" customer base for basic services would automatically be routed through VSNL's national and international lines. The Tatas justified the decision saying that while VSNL owns satellite and cable rights to carry international calls, it did not have an assured customer base at home.

HOWEVER, critics pointed out that in a situation with multiple network operators, subscribers would choose their preferred carrier for their domestic long-distance and international calls. The Tatas and VSNL could not by any means assume that VSNL would be the subscribers' preferred carrier for such calls. Industry sources told Frontline that though a captive customer base may be an added advantage, it was by no means a necessity in the business. They pointed out that several international long-distance carriers did not have an assured customer base.

DoT officials also threatened that action would be taken against the Tatas for not meeting their obligations to provide for rural telephony. VSNL's pending dues to the state-owned operator BSNL, amounting to over Rs.600 crores, was also waved at the Tatas. However, to seasoned observers of the business, such allegations suggested the hand of another industrial giant.

Those who have followed the fortunes of the publicly-owned companies in the business point to the systematic manner in which they have been tied down even as space has been opened to private operators. For instance, it was only in November 2001 that BSNL was allowed to enter the cellular telephony business, though it had held the licence for the last five years. In effect, BSNL, the company that was logically best suited for unrolling cellular telephony, was prevented to enter a business that constituted probably in the fastest growing segment in an otherwise recession-ridden economy. Moreover, citing their status as infrastructure service providers, the Finance Ministry had not allowed BSNL and MTNL to enjoy tax breaks that were provided to private telecommunication companies.

Critics allege that Mahajan's claims to be acting in defence of the public and national interest are not justified by the manner in which VSNL was run aground in the last couple of years before the Tatas gained control of it. First, the deadline for the end of its monopoly on international traffic was advanced to April 2002 from 2004. The company, then publicly-owned, desperately needed to diversify its operations, fully aware that the impending loss of monopoly status would be a blow to its business. VSNL had sought permission from the government, its owner, to expand operations into basic and national long-distance telephony.

VSNL was also prevented from establishing cellular telephony facilities. Ironically, the reason cited was that BSNL and MTNL were already allotted the licence for the third operator in the circles. At no stage did VSNL seek any measure from the government that would impose any financial burden on the exchequer. While every other Internet Service Provider (ISP) could obtain a licence for a mere Re.1 to establish operations anywhere in the country, VSNL was not allowed to expand beyond the six cities that it was catering to. While the government used its authority to undermine the business environment in which VSNL was working, it transferred large sums of money out of the company in the two years before it struck a "strategic sale" with the Tatas.

As the controversy gathered heat, Union Minister for Disinvestment Arun Shourie said that the matter was, in fact, a turf war among corporates. Following VSNL's forfeiture of monopoly rights over international telecom lines, four companies are in the fray to operate these lines - Bharti, Data Access, Reliance and Tata-VSNL. They are trying to establish themselves before there is any chance for complementation to build up in the business. Bharti already has its own international access gateway. It has a small client base, mainly those who call from its cellular circuits. Although Hong Kong-based Data Access has its own gateway, it has no retail customers. Reliance is trying to enter both the international and national long-distance segments. It has been trying to establish its own optical fibre network, particularly in the metros and bigger cities, so that it can skim the cream of the traffic in a deregulated environment. Although all these companies have plans, they rest crucially on the terms on which they are allowed to access the network that the DoT (and in recent times its "corporatised" avatars, BSNL and MTNL) has built over years at great cost to the public exchequer.

In another twist to the controversy, the VSNL sale was challenged in the Delhi High Court. In a public interest petition filed in the Delhi High Court, R.K. Maheshwari, an advocate representing the Forum for Peace and Justice, argued that the VSNL sale was violative of the Constitution. He argued that the deal violates constitutional provisions that governed the transfer of land and immovable properties of VSNL. The Tatas were represented by former Finance Minister P. Chidambaram.

Since the liberalisation process started, the Tata empire, once the biggest corporate group in the country, has been hit. During the last few years the group, under the leadership of Ratan Tata, has attempted a restructuring exercise. At the core of the effort is the shift away from hardcore manufacturing and towards services and consumer goods. The VSNL acquisition (and the earlier takeover of CMC) was a part of this exercise.

The political controversy over the Tata-VSNL affair is widely perceived to be a proxy war between two of the biggest industrial houses in the country, Reliance and the Tatas. While Mahajan has attacked the Tatas, Shourie has defended the group on the grounds that it was well within its rights to do as it pleased with VSNL's reserves. Sections of the BJP leadership also took sides in the controversy until Advani stepped in to settle the issue amicably.

The VSNL disinvestment was the first "big ticket" sale of a public sector company. A significant feature of the three instances of strategic sale of public sector companies - of VSNL, IBP and Indian Petrochemicals Corporation Limited (IPCL) - has been that there were few bidders. The small numbers involved in the bidding process suggests that cartels are at work. Cartels require collusion among the parties. Collusion also needs some discipline so that the "rules" are followed by the parties in the business. The VSNL disinvestment started off with six bidders. However, as the process unfolded there were just two players - the Tatas and the Reliance group. The Tata bid for VSNL was higher by Rs.92 crores.

Is privatisation less about ensuring free competition and more about the establishment of oligopolies with state aid?