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.