Judging by a recent missive sent by the Disinvestment Minister Arun Shourie to members of Parliament, the government is set on pre-empting criticism of its recently launched accelerated public sector sell-off programme. There are three elements to that programme, now being spearheaded by Shourie. First, it is being executed as per a time-bound agenda cleared by the Cabinet Committee on Disinvestment. Second, it operates on the premise that sale of PSU equity can be ensured only through the strategic sale route, which involves handing over management control to those who acquire a pre-specified proportion of the shareholding, even if this only amounts to a minority shareholding. Third, the sale is clinched with the bidder who offers the highest premium above the reservation price computed on the basis of valuation procedures that are proving extremely controversial, and which the Comptroller and Auditor General has refused to vet.
 
The accelerated programme to divest equity through the  strategic sale route was formalised in the September 27^th decision of the Cabinet Committee on Disinvestment (CCD), which drew up a time table for the sale of 13 public sector undertakings by March-end. These included Computer Maintenance Corporation (CMC), Hindustan Teleprinters Limited, Maruti Udyog Ltd, ITDC, Hindustan Zinc Ltd, IBP Company Ltd, VSNL, IPCL, Hotel Corporation of India, Jessop & Co, Nepa, Instrumentation Control Valves and Bharat Heavy Plates and Vessels. Besides this, the process of divestment of companies such as Indian Airlines, National Fertilisers Ltd, Madras Fertilisers Ltd and Hindustan Copper Ltd is already under way.
 
The error in pursuing such an agenda should be clear. To start with, such accelerated and time-bound divestment is bound to adversely affect the price at which equity is being sold, since potential buyers see an opportunity of winning a bargain out of the desperation implicit in the government's manoeuvres. Second, this effort is being pursued at a time when all is not well in India's stock markets, with shares of many companies ruling well below what insiders consider appropriate. In fact, in some cases share prices have mysteriously slumped after the announcement of the disinvestment proposal. Thus, in April this year, offcials found that the VSNL scrip, which had ruled at close to Rs. 400 when the proposed disinvestment was announced, fell to Rs. 300. This amounted to an implicit valuation of the company of Rs. 9,000 crore, when cash reserves with the company amounted to Rs. 7,000 crore. The difficulty is that these low share values tend to influence the price at which disinvestment takes place, even if they do not determine the actual disinvestment value. Finally, given its urge to complete the disinvestment process in time bound fashion, the government is forced to be “reasonable” when valuing PSU's as part of the process of determining the reservation price, as well as offer unusual concessions to cajole private players into buying into even profitable PSUs.
 
The principle concession the government is making to coax private players into lapping up PSU equity at a fast enough pace, is the strategic sale option. With equity shares as low as 25 per cent, a single private buyer would have full management control provided through a favourably framed shareholders' agreement. From the point of view of the private buyer this has many advantages. First, it provides control over the operations of a company with investments that are small relative to the size of the operations of the corporation involved. Second, if the buyer is an entity already involved in the area in which the concerned PSU operates, the purchase of management control at a small price, would substantially strengthen its oligopolistic poisition in the market. This would for example be true in the petrochemicals area if Reliance is successful in its bid to acquire a 25 per cent strategic stake in IPCL. Finally, the buyer is assured of a partner who would not merely not interfere in the functioning of the company, since the privatisation process is aimed at ridding PSU's of government control, but would, as is happening with Suzuki in Maruti, be able to buy up a larger share of equity at a later date if the profitability of the enterprise warrants it.
 
Despite this, insiders tracking the privatisation process believe that there is reason to believe that PSU's are being routinely undervalued when put up for sale. This was argued in the case of Modern Foods, based on an assessment of the value of the real estate held by the company, of BALCO, based on the value of a number of components of the company such as the captive power plant and the mining lease it holds, and of the valuation underlying the proposed sale of IPCL.
 
Most recently, the sale of ITDC's Bangalore properties in the form of a 30-year lease has triggered a controversy between the corporation and the Department of Disinvestment (DoD). When the deal was first announced, Bharat Hotels was to take over the Bangalore Ashok Hotel for a 30-year period in return for an upfront payment of Rs. 39.41 crore and a minimum guaranteed payment of Rs. 4.11 crore every year. However, when the deal was finalised, the Hotel was transferred along with a profit-making restaurant of the ITDC in Bangalore, which had recorded an operating profit of just over Rs. 4 crore last year. According to reports, ITDC has objected to the inclusion on the grounds that the restaurant was an independent unit, which had not been mentioned in either the demerger scheme that released individual ITDC properties for sale or in the expression of interest for eight ITDC properties. Given the fact that the restaurant is capable of earning profits close to the minimum guaranteed annual payment, the deal, in the view of the ITDC itself, amounts to offering the lease at just the amount paid upfront. The DoD has of course dismissed these protests saying that the restaurant was part of the deal and was taken into account in deciding the reservation price.