Economics

ACKNOWLEDGEMENT

We would like to express sincere gratitude to Ms. Sapna.S & all those people who have given unending support and saw us right through the completion of this project.

We are highly indebted to them for their guidance, for providing the needed information and also for the valuable suggestion in enhancing the standard of the report and we also thank for reviewing the entire manuscript with pain staking attention to all details and more so for their ability to spot and correct the minor error which inadvertently crept in.

CONTENTS

  • INTRODUCTION.
  • COMMON MINIMUM PROGRAMME.
  • CASES:

CENTAUR, JUHUBEACH.

CENTAUR, AIRPORT HOTEL.

BHEL.

  • 4.DISCUSSION.
  • 5.TABLES: [1991-92 to 2003-04]

METHODOLOGIES ADOPTED.

REALISATION THROUGH

STRATEGIC SALE.

INTRODUCTION:

Disinvestment is the action of an organization or government of selling or liquidating an asset or subsidiary.

EVOLUTION OF DISINVESTMENT POLICY

It has been decided that Government would disinvest up to 20 per cent of its equity in selected public sector undertakings, in favour of mutual funds and financial or investment institutions in the public sector. The disinvestment, which would broad base the equity, improve management and enhance the availability of resources for these enterprises, is also expected to yield Rs. 2,500 crores to the exchequer in1991-92.

The modalities and details of implementing this decision, which are being worked out, would be announced separately. The policy, as enunciated by the Government, under the Prime Minister Shri Chandrashekhar was to divest up to 20% of the Government equity in selected PSEs in favour of public sector institutional investors. The objective of the policy was stated to be to broad-base equity, improve management, and enhance availability of resources for these PSEs and yield resources for the exchequer.

PROBLEMS ASSOCIATED WITH DISINVESTMENT:
A number of problems and issues have bedeviled the disinvestment process. The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of better-performing PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment. These organizations have not been very enthusiastic in listing and trading of shares purchased by them as it would reduce their control over PSUs. Instances of insider trading of shares by them have also come to light. All this has led to low valuation or under pricing of equity.

Further, in many cases, disinvestment has not really changed the ownership of PSUs, as the government has retained a majority stake in them. There has been some apprehension that disinvestment of PSUs might result in the ‘crowding out’ of private corporates (through lowered subscription to their shares) from the primary capital market

An important fact that needs to be remembered in the context of divestment is that the equity in PSUs essentially belongs to the people. Thus, several independent commentators have maintained that in the absence of wider national consensus, a mere government decision to disinvest is not enough to carry out the sale of people’s assets. Inadequate information about PSUs has impeded free, competitive and efficient bidding of shares, and a free trading of those shares. Also, since the PSUs do not benefit monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses. This has in turn prevented the disinvestment process from being completely open and transparent.

Lastly, to the extent that the sale of government equity in PSUs is to the Indian private sector, there is no decline in national wealth. But the sale of such equity to foreign companies has far more serious implications relating to national wealth, control and power, particularly if the equity is sold below the ‘correct’ price.

If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically, issues such as - the ‘correct’ valuation of shares, the ‘crowding out’ possibility, the appropriate use of disinvestment proceeds and the institutional and other prerequisites.

Disinvestment is generally expected to achieve a greater inflow of private capital and the use of private management practices in PSUs, as well as enable more effective monitoring of management discipline by the private shareholders. Such changes would lead to an increase in the operational efficiency and the market value of the PSUs. This in turn would enable the much needed revenuegeneration by the government and help reduce deficit financing.

However, to date the market experience has been otherwise. The large national budgetary deficit on revenue account has been increasing. The government has not used the disinvestment proceeds to finance expenditure on capital account; i.e. the disinvestment policy has resulted in capital consumption rather than generation. Administrative costs of the disinvestment process have also been unduly high.

The actual receipts through disinvestment have often fallen far short of their target. During the period 1991-92 to 2002-2003, the government had targeted the mobilization of about Rs. 78,300 crores through disinvestment, but it could actually mobilize only Rs. 30,917 crores

After a great deal of initial excitement and reservations, disinvestment of public sector enterprises has become an ongoing process in the country. But the debate continues, with some enthusiastically endorsing it and others expressing apprehensions and opposition. By and large, this debate has been at the ideological level. Ideology cannot be kept out of the debate, but disinvestment has other dimensions too. The modalities of disinvestment are important. So are its consequences.

One possibility is strategic sale with complete transfer of management to an enterprise in the private sector. Modern Food Industries, Bharat Aluminum Company Limited (BALCO), VSNL, Centaur Hotel Airport Mumbai and a few others were sold off in this manner.

A second procedure adopted was partial disinvestment whereby the government still retained effective control by holding 51 per cent or more of equity. This has been the procedure adopted in the majority of cases. This is not a simple procedure, though. A decision has to be made as to who would be eligible to acquire the shares - other enterprises, employees or the public at large - and the manner in which the shares are to be off-loaded.

National Common Minimum Programme

The policy of the Government as stated in the National Common Minimum Programme of May, 2004 is as follows: “The Government is committed to a strong and effective Public Sector whose social objectives are met by its commercial functioning. But for this, there is need for selectivity and a strategic focus. It is pledged to devolve full managerial and commercial autonomy to successful, profit-making Companies operating in a competitive environment. Generally, profit-making Companies will not be privatised.

All privatisations will be considered on a transparent and consultative case-by-case basis. The existing “Navaratna” companies will be retained in the public sector while these companies raise resources from the capital market. While every effort will be made to modernize and restructure sick public sector companies and revive sick industry, chronically loss-making companies will either be sold-off, or closed, after all workers have got their legitimate dues and compensation. The Government will induct private industry to turn around companies that have potential for revival.

The Government believes that privatisation should increase competition, not decrease it. It will not support the emergence of any monopoly that only restricts competition. It also believes that there must be a direct link between privatisation and social needs – like, for example, the use of privatisation revenues for designated social sector schemes. Public sector companies and nationalized banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors.”

CENTAUR, JUHUBEACH

A true-blue 5 star Deluxe, the Centaur Juhu rises sphinx like from the golden sands of Mumbai's famous Juhu beach. Shaped like a luxury liner, the hotel nestles between the city and the rapidly developing industrial belt of the suburbs.

Disinvestment of the hotel/flight kitchens of the Hotel Corporation of India, a subsidiary of Air India, was initiated by Air India under the supervision of the Ministry of Civil Aviation. A Sub-Committee of the Board of Air India was constituted by the said Board to oversee the disinvestment process. On the basis of the Sub-Committee's recommendation, Air India appointed M/s Jardine Fleming Securities India Ltd. (currently known as M/s JP Morgan India Pvt. Ltd) as Global Advisors on June 6, 2000. An advertisement inviting Expressions of Interest from the prospective bidders was issued by Air India on October 11-12, 2000 for all the businesses of the Hotel Corporation of India including Centaur Hotel, JuhuBeach, and Mumbai. The Sub-Committee, with the assistance of the Global Advisors, accomplished:

(i)Finalisation of the transaction structure of selling the individual businesses on slump sale basis;

(ii) Finalisation of the Confidential Information Memorandum;

(iii) Shortlisting of bidders;

(iv) Appointment of Legal Advisors and Asset Valuers;

(v) Conducting data room study and due diligence by the bidders; and

(vi) Finalisation of transaction documents.

On 27th September 2001, based on a Government decision, the Department of Disinvestment took over the process of disinvestment in Hotel Corporation of India. After taking over the process, Department of Disinvestment constituted an Inter-Ministerial Group and adopted the transaction structure and transaction documents as finalized by Air India.

For the five businesses of Hotel Corporation of India that were offered for sale, the Qualified Interested Parties had already been identified. In respect of CentaurHotelJuhuBeach, Mumbai, Expressions of Interest were received initially from 20 parties of whom three were found to be ineligible. Of the remaining 17 Qualified Interested Parties, 16 did not furnish the prescribed Expression of Intent Letters along with the Earnest Money Deposit of Rs. 5 lakhs, thereby withdrawing themselves from further participation from the disinvestment process. Therefore, there was only one Qualified Interested Party. On 24th October 2001, the Global Advisors addressed the Qualified Interested Party, viz., namely, M/s Tulip Hospitality Services Ltd asking it to submit its price bid on 6th November 2001. M/s Tulip Hospitality Services Ltd submitted its price bid on 6th November 2001.

An Evaluation Committee comprising the concerned Joint Secretaries of the Ministry of Civil Aviation and the Ministry of Disinvestment and the Managing Directors of Air India and Hotel Corporation of India under the chairmanship of the Joint Secretary & Financial Advisor, Ministry of Civil Aviation met on 8th November 2001. After detailed consideration of the asset valuation report prepared by the Asset Valuer (M/s Kanti Kararnsey & Co., Mumbai), the valuation report prepared by the Global Advisor and the merits and demerits of the various methods of valuation adopted by them and the then prevailing market conditions, the Evaluation Committee determined the reserve price for Centaur Hotel Juhu beach Mumbai at Rs. 101.60 crores. The price bid, which was in a sealed cover, was thereafter opened by the Evaluation Committee on 8th November 2001. The bid was for Rs.153.00 crores.

The Evaluation Committee recommended for acceptance the financial bid submitted by M/s Tulip Hospitality Services Ltd of Rs.153.00 crores for CentaurHotelJuhuBeach, Mumbai, since it was above its determined reserve price. The Inter-Ministerial Group, in its meeting held on 9th November 2001, accepted the recommendation of the Evaluation Committee. The recommendations of the Evaluation Committee/Inter-Ministerial Group were accepted by the Core Group of Secretaries on Disinvestment on 9th November 2001 and by the Cabinet Committee on Disinvestment on 10th November 2001. Initially, Air India proposed to execute the Agreement to Sell by 21st December 2001 and notified M/s Tulip Hospitality Services Ltd. However, M/s Tulip Hospitality Services Ltd made a series of representations from time to time, seeking extensions for conclusion of the transaction. Three extensions were given to M/s Tulip Hospitality Services Ltd, the last being on 23rd February 2002. These extensions were given apparently with the view to complete the sale of Centaur Hotel, JuhuBeach, Mumbai at a price of Rs.153 crores, which was above the reserve price of Rs.101.60 crores. Since some concerns had arisen with respect to M/s Tulip Hospitality Services Limited's ability to meet the financial obligations under the transaction, a decision had been taken on 21st February 2002 to invoke the Bank Guarantee of M/s Tulip Hospitality Services Limited and to terminate the deal. However, the Chairman, M/s Tulip Hospitality Services Limited met the then Minister of Disinvestment on 22nd February, 2002, and sought an opportunity to demonstrate M/s Tulip Hospitality Services Limited's intent to complete the transaction by producing his consortium of bankers before the Minister.

On 23rd February 2002, M/s Tulip Hospitality Services Limited and the consortium of bankers, which consisted of both public sector banks and private banks, met the then Minister of Disinvestment and committed to finance the sale transaction by 9th March, 2002. On this commitment, a further extension was granted on 23rd February, 2002, until 9th March, 2002. Since, 9th March, 2002 was a Saturday, high value clearing did not take place and, consequently, the transaction was completed on 11th March 2002. The business was transferred to M/s Tulip Hospitality Services Limited on 31st May 2002 on completion of transaction formalities.

As per the transaction Agreement, M/s Tulip Hospitality Services Limited was bound to offer a Voluntary Retirement Scheme to the employees of the hotel by 30th May, 2003. Anticipating that the management might not offer the Scheme in time, the Officers' Association filed a writ in the Bombay High Court on 9th May, 2003 itself. On the directions of the High Court, M/s Tulip Hospitality Services Limited introduced a Voluntary Retirement Scheme on 1st October, 2003. Since this was not fully acceptable to the Association, it approached the High Court again. However, the High Court did not give any further relief. Thereafter, on 1st July, 2004, the Association moved the matter before a Division Bench of the Bombay High Court. While the matter is before the Division Bench, the Officers' Association and the management have come to an agreement on all critical issues on 6th August, 2004. On the basis of this agreement, M/s Tulip Hospitality Services Limited filed an affidavit before the Bombay High Court on 12th August, 2004. The case now stands adjourned to 10th January 2005.

It looks odd that it was a single bidder transaction. It further looks odd that the Discounted Cash Flow method of evaluation was adopted in this case.We do not think that this method is the only method, or the most appropriate method of evaluation in all cases. It further looks odd that so much indulgence was granted to the bidder by way of not invoking the bank guarantee, which was ordered twice, and by way of granting him repeated extensions. We personally think that as a result of its disinvestment zeal, the then Government overlooked some discomforting aspects of this transaction.

The agreement does not permit the resale. The matter is now sub judice before the High Court of Bombay regarding the Voluntary Retirement Scheme. But, if there is a violation of agreement, certainly the Ministry of Civil Aviation will be advised to take necessary action.

CENTAUR, AIRPORT HOTEL

It was an announcement that shocked even the overzealous minister for disinvestment, who believes nothing can go wrong with his high profile drive to sell public properties at a rapid pace. On October 18, 2002, Batra Hospitality Pvt Ltd announced that it had sold Centaur Airport Hotel at Mumbai to the Sahara India group for a sum of Rs 115 crores. What was reported as a routine commercial transaction by A L Batra of Batra Hospitality has triggered a controversy that is likely to prove extremely embarrassing to the government. This was because the Airport Centaur had been acquired by Batra from the Air India subsidiary Hotel Corporation of India (HCI) for a sum of just Rs 83 crores, barely six months back. At that time, this sale of Airport Centaur (along with the Centaur Hotels in Juhu and Rajgir) was presented as one more case of the highly successful and transparent, accelerated disinvestment drive that Arun Shourie had launched.

THE issue of resale of the disinvested Mumbai airport Centaur hotel at a premium of Rs 32 crores was raised on by an independent panel that included CPI (M) Member of Parliament, Mr. Dipankar Mukherjee.

Addressing a press conference here, Mr. Mukherjee said that the "links" between Batra Hospitality that bought the hotel and resold it at a substantial premium, and former Prime Minister, Mr. Atal Bihari Vajpayee's son-in-law, Mr. Ranjan Bhattacharya, should be probed by the Central Bureau of Investigation (CBI).

Terming Batra Hospitality as a "shell company" that "did not have the financial strength or experience in running a hotel," Mr Mukherjee said the hotel was sold to it because of its owner's experience in running Delhi's Radisson Hotel through AB Hotels Ltd.

"Are these links coincidental, incidental or accidental? We are not putting anyone in the dock. What we want is that the CBI should investigate and expose the entire scam," Mr Mukherjee said at a press conference in which the CPI (M) General Secretary, Mr Prakash Karat, was also present.

Mr. Karat said he was only a "facilitator" for the three-member panel headed by Mr. Mukherjee, which looked into the matter. Other members of the panel were Supreme Court lawyer, Mr. Prashant Bhushan, and journalist, Mr. Paranjoy Guha Thakurta, who were also present at the press conference.

Referring to reports quoting CBI that it was not finding much material to proceed with the probe into the Airport Centaur deal, Mr. Karat said, "We are releasing this material in public interest and to help the Government and CBI proceed in this matter."

Yielding to demands of the Left parties, the Congress-led UPA Government on Friday announced an inquiry into the controversial sale of two state-owned Centaur Hotels in Mumbai in view of severe criticism made by the Comptroller and Auditor General (CAG) of the then BJP-led NDA Government for undervaluation of the hotels.
After examining CAG’s report, the government decided to order an inquiry, Finance Minister P Chidambaram announced in both the Houses of Parliament.
The nature and scope of enquiry would be announced in due course, he said in a brief suo motu statement. Significantly, when this announcement was made, the Opposition NDA was not present as it was boycotting Parliament.