People's Democracy

CAG EXPOSURE 

On Privatisation Deals By NDA Regime: Corruption Unveiled -II

Tapan Sen 

VALUATION 

Valuation is central to the disinvestment process which provides for benchmark or reserve price of the PSU based on which the bids are to be evaluated and decisions are to be taken. But the manner in which the valuation of the PSUs has been handled by the Global Advisor and the DOD exposed the most devilish approach of ensuring, rather making undervaluation a certainty at every step of the valuation process. 

The asset valuers were appointed from the panel recommended by the Global Advisor but in none of the cases, criteria for shortlisting the asset valuer were determined or specified. CAG examination also revealed that adequate time was generally not allowed to the asset valuers. 

Secondly, the ministry prescribed four methodologies of valuation viz., Discounted Cash Flow Method(DCF), Transaction Multiple Method, Balance Sheet Method and Asset Valuation Method to be used by the GA. While first three methods are resorted to for valuation of a going concern, the Asset Valuation Method are applied for companies under liquidation and also assess the value of replacement cost of the assets of the business. The examination by CAG of the valuation process brought out glaring instances of deliberate undervaluation of the PSUs in all counts.

The business plan of the PSU, containing future projections, strategies and prospects of business is one of the most important document for ascertaining the appropriateness of the business valuation and particularly for cross-checking the ‘projected future earning capacity’ of the PSU as required under valuation through Discounted Cash Flow Method. The business Plans of VSNL, HZL and IPCL were not made available to CAG for examination. 

The CAG report also revealed numerous instances of improper or far too conservative assumptions having been adopted by the Global Advisors while arriving at business valuation under the DCF methodology. In case of Modern Food Industries Ltd (MFIL), the growth potential, output and income of 24 franchisee operation with a bread manufacturing capacity of 5.54 lakhs standard loaves per day was totally ignored. In BALCO’s case, the capacity addition of around 38400 MT as a result of commissioning of a new Cold Rolling Mill in 2000-01 (over and above the existing plant producing 93000 MT) have not been taken into account in business valuation by GA. For CMC the Global Advisor’s projection for revenues was on the lower side and those for expenses were on higher side than those stated in PSU’s business plan which resulted in depressing the business valuation. In Paradeep Phosphates Ltd (PPL), CAG noted discrepancies in the production figures of various products projected by the Global Advisors and those indicated in the annexure of GA’s own valuation report (incidentally the PPL was sold out at a price which is below the reserve price). In IPCL, the GA projected the sales growth on the lower side compared to the actual performance and had provided the consolidated figure of expenditure without any details while deriving net cash flow. And while deriving free cash flow, the GA adopted the weighted average cost of capital(WACC) at a higher value of 15 per cent compared to 13.8 per cent adopted in other aspects of valuation which led to depressing the business valuation. In case of Hindustan Zink Ltd (HZL), CAG noted serious inconsistencies in the projections made by the GA in respect of revenues and expenditure and the relevant periods and also in the assumption of higher tax rate than actual, which had the impact of lowering the enterprise value. The CAG also noted serious inconsistencies in computation of the equity value in all the nine PSUs which also contributed to the undervaluation process engineered by DOD. 

The asset valuation process of PSUs under sale, as examined by CAG exposed scandalous defaults on the part of DOD and the ministry. In case of VSNL, the finance ministry had to admit while responding queries from CAG that “they had no mechanism to ensure that all the fixed assets had indeed been valued.” In case of Hindustan Teleprinters Ltd (HTL), the CAG’s concrete observations clearly revealed that the huge landed property of the company was grossly undervalued. In many cases, even the core assets of the PSUs have not been properly valued by the asset valuer. In case of MFIL, the CAG pointed out clearly that non-valuation of plants and machineries, which were perfectly in working condition, was an act of omission. CAG also pointed to the impropriety of not valuing the leasehold prime land in Delhi and Silchar under MFIL. In case of BALCO, the asset valuation process excluded the value of leasehold land housing the plant and township, besides the ropeway and railway siding in Korba and the office accommodation in the SCOPE Complex in New Delhi. In case of Hindustan Zinc Ltd (HZL), out of six mines, only one has been valued at market rate and rest, assumed as inoperational have been valued at a much lower rate. Examination by CAG also revealed that the Global Advisor made wrong assumption while making valuation under the discounted cash flow method and the ministry’s reply to the queries substantiated the same. It was also pointed out by the CAG that the intangible assets of the PSUs like goodwill, brand value, distribution network, customer base, patents etc have not been taken into account. In case of BALCO and IBP, capital-works in progress have not been evaluated. 

The reserve prices thus fixed by such corrupted valuation process as detailed above would naturally be lower than what they should have been and these manipulations in fixing reserve prices got further exposed by concrete observations made by CAG saying that “ In most cases, wide variations were observed between the reserve price fixed by the government and the financial bid finally accepted.”(3.6.2).

SINGLE BID SELL-OFF

The CAG has also made stringent remark about the unsatisfactory competition in the bidding process crafted by the Global Advisors and the DOD. As a matter of fact, the whole process of disinvestment exercise has been so crafted by the DOD and operated through the Global Advisors that finally the sale operation has been left with a choice between two or at best three financial bids in most of the nine cases. As the CAG Report revealed, though 70 bidders were shortlisted by the ministry, as many as 48(69 per cent) had withdrawn from the bidding process encompassing the nine PSUs under examination. And the CAG commented, “The real test of the expertise and reputation of the advisors and the transparency of the process of their appointment would have to be the effective competition generated in terms of the number of financial bids and the value addition…through their specific effort, including consistent and transparent valuation exercises.”(3.6.4)

In fact in only two out of the nine cases of disinvestment under examination, there were formally more than two financial bidders. But a close scrutiny of the CAG report, exposed that the situation is even more critical clouding the integrity and transparency of the sell-off exercises. In case of three PSUs out of nine examined by CAG, viz., MFIL, CMC and PPL, sell-off was concluded on the basis of single bid which by itself was grossly irregular. And the unscrupulousness of such single-bid sale was further heightened by the fact that in case of MFIL, the financial bid was invited without fixing the reserve price, and in case PPL, the company was handed over to a single bidder at below the reserve price decided by the government.

In six other cases, though there were formally more than one financial bid, in reality in two more cases, viz., BALCO and IPCL it was virtually a single bid situation and despite that the government, in stead of going in for inviting fresh bid, hurried through the sell off process. In BALCO the second bid had been much below the reserve price fixed by the government and should not have been taken into account as it was a non-serious bid. In case of IPCL, the most profitable of the entire lot, out of three bids received, two were below the reserve price landing that case also in a practically single bid situation. Thus, out of nine PSUs examined by CAG, five PSUs were sold out on the basis of single bid. This explains the desperation the NDA government had for selling the PSUs at any cost by any means, totally unconcerned of its impact on the exchequer and defeating the very ‘purpose of resource mobilisation’ touted by them. .

POST CLOSING FRAUD

Undervaluation, depressing the reserve price and pushing through the sell-off on a single bid basis in majority of the cases were not enough for the NDA government and its disinvestment ministry. The whole exercise was carried on by those in governance not to serve the government exchequer, nor to restructure or strengthen the sold off companies, but only to serve the predetermined chosen buyers and also those involved in the process. And this complete loyalty and commitment of the sellers of the NDA brand to the interests of the private buyers got further reflected in meticulously crafted provisions of post closing adjustment in the Share Purchase Agreement (SPA) which was designed to favour the buyer by enabling them to get back at least a part of the price paid by them and in some cases the whole of it. 

As per post closing adjustment clause, the difference between the position of net working-capital and debt as on the date of last audited balance sheet and that on the date of purchase of disinvested shares by strategic partner (SP) was to be worked out by the jointly appointed accounting firm and the government was required to make good the difference to SP in case of depletion in net working-capital and increase in debt, and vice versa. The valuation process, fixing of reserve prices of the PSUs under sale, relaxing conditions laid down in the EoI documents etc undertaken by the government have all gone in favour of the prospective buyer to facilitate sell-off at a undervalued price, mostly by single bid exercise. Given the mindset of the operators of disinvestments it will be naïve to expect that the result of jointly working out the differences in net worth of the companies sold out will go in favour of the government. And precisely that is what has happened. In case of the Modern Food Industries Ltd (MFIL) sold off through single bid at Rs 105.45 crore, the Govt had to pay back already Rs 12.64 crore to Hindustan Lever on this post closing adjustment account and its further claim of Rs 4.43 crore on the same account is still under examination which is destined to be paid back given the mindset of the always-obliging authorities in the ministry. In case of BALCO, despite being sold out at an undervalued price as exposed by the CAG, that too through a defacto single-bid process, the strategic partner Sterlite claimed Rs 16.72 crore. And most interestingly, in case of HTL and PPL, the claim lodged by the buyers was (Rs 56.49 crore and Rs 151.55 crore respectively), had the potential of wiping off the entire sale proceeds received by the government meaning thereby a free gift of both the public sector companies to the respective private buyers. 

While commenting on the very efficacy and justification of the ‘post closing adjustment’ clause in the Share Purchase Agreement(SPA), the CAG noted in clear terms that “in none of the four unlisted PSUs (BALCO, MFIL, PPL, HTL for whom the clause is operative), was there a situation where the government could have gained out of the operation of this clause which ended up being not only one sided and open ended but stood firmly in the way of a proper assessment of the actual outcome of disinvestment.”(3.9.2)

Even in case of IPCL, the buyer lodged a third party claim of Rs 927.41 crore, on account of alleged non-disclosure of certain factual matters in the financial statements or in the due diligence process. While scrutinising the case, CAG made a clear pointer to the deficiencies and incompetence of the agencies involved in the process including the ministry and noted, “The claim of SP(the buyer)in the case of IPCL was more serious as it was based on the grounds of non-disclosure of relevant information in the financial statements or even in the due diligence process….The fact….indicated that there were deficiencies which did not …ab initio prevent such claims from being raised by the SP after disinvestment. This also brings into question the competency of Global Advisor and the legal advisor in this case…..The ministry’s reply…..also pointed to the absence of a clear accountability mechanism in the approval process of disinvestment besides highlighting deficiency in documentation.”

What has not been told by CAG but can very well be inferred from the analysis made in the report that the defaults and deficiencies are not accidental but deliberate. The manner IPCL’s control was handed over to the strategic buyer on a virtually single bid basis, that too through a second round of bidding, the manner IOC ‘s claim supported by the petroleum ministry for taking over IPCL for its operational synergy was ignored by the government purely on ideological ground of ensuring privatisation only, and the manner IPCL’s business was undervalued in the valuation process, the possibility of deliberate defaults in the disclosure and due diligence process by the GA and the operators of privatisation in the then government to create avenues for the concerned private buyer to raise post-disinvestment claim cannot be ruled out. And the end result is that the government is faced with a possibility of returning around 62 per cent of the price received by them through privatisation of IPCL. If this is not corruption, what else is this? 

The balance sheet of the privatisation of these nine PSUs thus stands like this: The government collected only Rs 5544.42 crore by handing over the control and ownership of nine PSUs to chosen private players, which is less than one tenth of the real value of assets lying with those nine PSUs by mere common-sense estimate. And at the end of the day, the total claim lodged by those chosen strategic buyers with the government on post closing adjustment account and as third party claim (in case of IPCL), stands at Rs 1169.65 crore which if finally met would take back more than 20 per cent of whatever paltry amount received as sale proceeds. For at least three out of nine PSUs, it would be the case of unauthorized free gift of public properties by the ‘caretaker’ government. And post privatisation, instead of gaining strength and operating more efficiently, MFIL, PPL and HTL turned sick and were referred to BIFR. 

The omissions and commissions, exclusions and arbitrary assumptions by the Global Advisors and the valuation agencies, improprieties, defaults and deficiencies in handling the disinvestment exercise, can no way be construed as mere mistakes. They are all deliberate actions engineered by the Global Advisors at the instance of DOD and the concerned ministry. And most unfortunately, in hundred per cent cases, the ministry justified (May 2006) all misdeeds and mind it, it is the ministry of UPA government justifying the misdeeds of their NDA counterparts. “Privatisation at any cost” is the philosophy which binds the two otherwise opposing entities.

The CAG report no 17 of 2006 established, beyond doubt, the case of selling national asset to chosen buyers after deliberate undervaluation. This is the very definition of corruption and the element of deliberateness in the process also established the criminal intent. This requires to be probed thoroughly and mind it, the probe must be for finding out the perpetrators of the crime and corruption in recklessly dealing with national wealth in those nine PSUs, since the crime is already established. The privatisation deals of Juhu Centaur and Airport Centaur exposed by the CAG report no 2 of 2005 are already in the scanner of CBI. The deals on these nine PSUs as examined and analysed by the CAG report no 17 of 2006 should also be sent to the CBI. 

Criminality will not pass!

(Concluded)