Privatisation: Let’s Playback before We Fast Forward
The government’s decision to move from pseudo-privatisation to an actual sell-off, amounting to relinquishing of control, has triggered celebrations on the stock market. Shares of the four banks, assumed to be privatised immediately, hit upper circuits. Privatising chronically sick, money-guzzling public sector undertakings (PSUs) is, indeed, a good thing, especially in sectors where the government has no business being in business. A broad policy framework, classifying PSUs into strategic and non-strategic, preceded the decision to sell or close 151 non-strategic ones. But there is no clear roadmap of how this will be done and most information in the public domain is from ‘source’-based news reports. 
 
Anurag Thakur, Union minister of state for finance, told The Economic Times that the government had to be ‘fair’ and ‘reasonable’ and couldn’t offer a sick bank for sale; otherwise, there would be no buyers. The same interview spoke of how the government had worked extensively on cleaning up the bad loans mess inherited from the UPA (United Progressive Alliance), recapitalised banks, amalgamated them and pulled many out of the PAC (prompt corrective action) framework. Also, as part of the clean-up, a ‘bad bank’, probably backed by sovereign guarantee, will take over the massive non-performing loans of public sector banks (PSBs). But what about their undervalued assets? 
 
Each PSB owns a large branch network and real estate across the country to house lavish offices, guest houses, official quarters, auditoriums, training institutions, etc, that are probably worth thousands of crores. While successive governments have re-capitalised PSBs at public cost, there has never been a serious market valuation of their assets or an attempt to check if these can be used to reduce their losses. Even today, the process of cleaning them up for a private buyer does not seem to include realistic asset valuation. 
 
If so, the new owners will look to immediately sell, consolidate and extract their purchase price from the very companies they buy. This is not advance criticism, but a gentle reminder that there is much to learn from the hasty privatisation by another NDA (National Democratic Alliance) government two decades ago. A slew of PSUs was sold off then, allowing private owners to recover most of their acquisition cost by exploiting the real estate alone. We, as citizens, have the right know how mistakes of the past will be avoided before we hand over cleaned-up banks to private bidders. Consider these examples from NDA-1.
 
Sale of the Centaur Hotels: The privatisation of Air India is on the cards this year. So let’s look at how two valuable hotels, owned by Air India’s subsidiary Hotel Corporation of India (HCI), were divested in 2001. In 2002, the Centaur Hotel at the Mumbai airport and Centaur Hotel at Juhu were sold separately. Amrit Lal Batra, a hotelier close to the RSS, bought airport Centaur for just Rs83 crore through Batra Hospitality. In exactly four months, he sold it to the Sahara group at Rs115 crore netting a 35% profit in four months. It exploded into a controversy; but the bid documents hadn’t barred this back-to-back sale. 
 
The saga doesn’t end there. The Hotel was built on 30,000 square metres of prime land owned by the Airports Authority of India, had 300 rooms, five restaurants, three banquet halls and sprawling space around the Hotel thickly covered with trees. The value of assets was ignored because it was sold as a ‘going concern’ ostensibly to protect employees. Immediately after the acquisition, Sahara wangled permission to expand the floor space index (FSI), which determines how much covered floor area can be built, considerably, chopped the trees and extracted considerable value from the real estate, probably more than its acquisition price. The beleaguered and controversial Sahara group, which is unable repay thousands of depositors, continues to control the prized luxury property.
 
The sale of Juhu Centaur was just as controversial. This fantastic property, built on six-acres of prime real estate, with over 370 rooms, was sold for a mere Rs153 crore. It was acquired by Ajit Kerkar (former chairman of the Taj group of hotels), whose Tulip Hospitality was the sole bidder, although it couldn’t even cobble together the price after winning the bid. PSBs and LIC were prodded by the government to fund the acquisition and, yet, it was immediately downgraded from a 5-star to a 3-star hotel and had no funds even to renew key licences. In 2013, after it defaulted on loans, the Hotel was acquired by an asset reconstruction company which had then valued the assets at Rs1,300 crore. It remains embroiled in litigation even today because Mr Kerkar had entered into a deal with a realty company to exploit the property.
 
Curiously, none of the major hotel chains in India, or even global hotel majors, who have subsequently established a large presence in India, bid for the two lucrative properties, although they would have paid more and had all been interested. But two controversial private owners were allowed to acquire, exploit and ruin the assets. Another Delhi hotel was converted into an office building. Twenty years later, the government remains in the hospitality business, primarily because politicians and bureaucrats want to exploit them.
 
Sale of VSNL: In the 1990s, under chairman BK Syngal, Videsh Sanchar Nigam Ltd (VSNL), was a cutting-edge telecommunications giant which gave a big fillip to Indian software companies with world-class internet and data services. It was classified as a ‘navratna’ but its success led to dirty politics by dubious competitors. Mr Syngal was unfairly removed, the company run to the ground and quickly ‘privatised’. Like other PSUs, VSNL had massive real estate and reserves. The Tatas acquired control by buying a 25% stake for Rs1,439 crore in 2002. Within days of the acquisition, the much-venerated Tatas were set to divert Rs1,300 crore of VSNL reserves to Tata Teleservices, a loss-making group entity. This move was stopped when it blew up into a major controversy.
 
VSNL also owned 773 acres of excess land which was fortunately kept out of the bid and was to be demerged into a separate company where the government would get 51% of the value. Shockingly, this languished for 14 long years. In 2016, the Financial Express reported that the land, spread across five cities was then valued at Rs6,156 crore, was, finally, demerged into a company called Hemisphere Properties India. It is unclear if the government has realised any value from the land, as yet.
 
BSES and Reliance: This is a good example of how private companies are focused on assets, while the government isn’t. The Reliance group, which acquired a stake in BSES Ltd (earlier Bombay Suburban Electric Supply) in the mid-1980s, stepped up to acquire management control in 2001with a two-stage public offer that took its stake to 51% in the distribution company. BSES had valuable land in Mumbai, including a chairman’s bungalow spread over 1,537 sq metres of land at the posh Pali Hill and its head office on four acres of prime land off the Western Express highway. After the acrimonious Ambani split, Anil Ambani acquired control. 
 
 
In 2018, after massively mismanaging the business and running up huge debt, Anil sold the business to Adani Transmission; but the two properties were kept out of this deal. According to a media report, the sale of the head office alone ‘could fetch up to Rs3,000 crore’. Yes Bank has now taken possession of the property. The bungalow has been torn down to build a luxury tower, which is also valued at a few hundred crores. Only these two assets would have been worth a significant chunk of the acquisition cost, even before re-rating of assets in 2001. Reliance Industries (RIL) has, similarly, struck gold in acquiring Indian Petrochemicals and Chemicals Ltd which was sold despite objections of the then disinvestment department. Since the 1960s, governments have been generous with handing over land to PSUs which is not correctly valued even as they have sucked up a great deal of public money as support from the exchequer. As we embark on another round of disinvestment, it is important to ensure that global consultants, hired for the job, don't doctor bids to allow fake privatisation, again bank-rolled by the remaining PSUs.
 
 

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    COMMENTS

    Kamal Garg

    2 weeks ago

    Why can't we learn to handle objections to any matter in a simple and spirited manner. If Hindustan Zinc Ltd.'s sale offers were invited and some Anil Agrawal bid a price of around Rs.12 per share in an open and transparent bidding manner against the then prevalent price of around Rs.8 per share, what is wrong with the entire process. Post facto, there would always be objections, why not before that?

    REPLY

    shirishag75

    In Reply to Kamal Garg 1 week ago

    Even if they do that, and it has been done, the Govt. routinely ignores that. If you look at replies to her video blog on the same subject, you will find so many more cases/situations when people had shared, govt. ignored and went forward. This is crony capitalism at its best/worst.

    Kamal Garg

    In Reply to shirishag75 1 week ago

    For the sake of healthy discussion, clarity and taking the matter forward, kindly share some concrete examples from past such divestment exercises where a valid, logical and concrete proof of objections which were not addressed. Within the pre-approved system, every one would like to play his/her game to his/her advantage and there is no harm in that. If today, this government divests BPCL at the market price or plus some controlling premium, and then, after one year, the market price shoots to more than Rs. 1000 per share (which btw it will shoot - no matter at whatever price this government divests ), do we/should we blame the government or rather keep on blaming any government, for that matter, because we all become wiser and intelligent in the hindsight.

    dayanandakamath29

    2 weeks ago

    I have long back suggested that Govt undertakings should demerge their real estate into separate company and should be held by a common holding company per each ministry which managed the PSU. VSNL demerger is example the problems emerged due to demerger was after disinvestment. If the advice was adhered then the disinvestment would have been smoother now. Even this cleaning of balance sheet is actually cleaning the provisions held for a bad loan created out of income from good assets. The beneficiary will be the acquirer. And disposing an asset cheap and showing it as profitable disposal by taking into consideration the write back of provisions is nothing but being happy that I have not given chance others to cheat me as I have cheated myself. We refuse to learn from past.

    Ramesh Popat

    2 weeks ago

    tug of war between buyers and seller ! winner, buyer !
    he knows the compulsion, and is ready long before the
    deal. and he gets best buy by price artificial distortion
    at lowest price!

    duvvuridp

    2 weeks ago

    it is for this precise reason of gouging the assets of PSEs that the stock markets and private sector mandarins get excited about privatisation. The private sector does not have any great examples of the so-called efficiency in managing banks. HDFC bank is about the only serious example of the reasonable well run bank. The drooling is about the assets of large PS Banks which will be deliberately passed on to the so-called efficient private sector managements. the tax payer deserves this as they too believe that handing over is a great reform!

    pushpa_s

    2 weeks ago

    Unfortunate that public (tax money) is used to fund Bad loans which are bad because of excessive loans to an entity which did not use for business purpose, but personal use. I can understand bad loans due to genuine business going bad for reasons, but most of the bad loans are to rich businessmen who do not put a single paisa of equity but raise loans and use them for personal use. Banks should hold in lien their properties and court should quickly give a verdict of its sale once loan is defaulted and repeated reminders for 2 years go unheeded.

    As far as sale of PSU banks, the property and operating business valuation should be done separately and govt. should recover the bad loans by sale of the assets. The pvt. party will have the advantage of a cleaner balance sheet and has to bring in funds to kickstart the CASA and loan book. The govt. from its recovery can support such banks with a low interest for 5 years to assist the pvt. player in the new venture.

    This point also brings the deposit insurance. Rather than wait for the bankruptcy code, once the bank is taken over by RBI or it is stopped from taking deposit, the deposit holders should be given the deposit as per the deposit insurance limits. This will help depositors and not wait indefinitely for the insurance money.

    Meenal Mamdani

    2 weeks ago

    Ms Dalal has exposed the underhand dealings, possibly criminal, that have allowed these gangsters, hiding under the personae of fraudulent entities, to scoop off enormous illegal bonanza.
    Unfortunately, all the politicians, NDA and UPA, are hand in glove with these entities.
    Will India become a banana republic?

    REPLY

    Nishant Jha

    In Reply to Meenal Mamdani 2 weeks ago

    Is already a 🍌 republic.

    gbrhyd

    2 weeks ago

    This is very simple. The understanding between the corporates and politicians. Politicians get loads of money from corporates and that they spend in elections to get back in to power. Here,only middle class people are the victims, none to help them.

    ashoksinghania10

    2 weeks ago

    real corruption is by practising fiscal prudence we have already drive down the asset price low. same asset when govt debt gdp ratio crosses 65% of gdp from current 45% of gdp will be worth three times more and even corporates have been subsidized by citizensof india in form of high petro leum taxes in terms of genorous tax breaks given to corporates. corporates this will purchase asset vitually free free free. this happened during atal bihari vajapees period whenhe increased fiscal defecit indian economy revived now we are doing the same

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