In a desperate last-minute, pre-Budget manoeuvre, the government has chosen to announce the 'strategic sale' of equity in Bharat Aluminium Company Ltd. (BALCO). Set up in 1965 at Korba in Madhya Pradesh to manufacture aluminium rods and semi-fabricated products and instructed in 1984 to take over a sick unit in Bidhanbag, West Bengal, with downstream facilities in sheets, foils and alloy rods, BALCO is today the third largest player in India's aluminium industry. The Korba facility includes bauxite mines, an alumina refinery, a smelter and a fabrication unit, besides a 270 MW power plant, which meets a substantial plant of the unit's power requirements, and a fully built-up township spread over 15000 acres in which over 4000 families live.
 
Sterlite Industries that won the bid for BALCO, would have to pay Rs. 551.5 crore for a 51 per cent stake in the company that controls these assets. In the government's recently-coined disinvestment terminology, a 'strategic sale' refers to one in which a minority shareholding of 26 per cent or more is divested to a single buyer who is handed over management of the company. Usage of that term in the proposed sale of BALCO makes little sense, since Sterlite, with its majority equity holding would in any case be in a position to completely control the operations of the firm.
 
No sooner was the BALCO deal announce and it created a furore within and outside Parliament. The opposition to the deal has been strong on many counts. First, since BALCO is a profitable and cash-rich public sector corporation with an extremely low debt to equity ratio, it would have been possible for it to finance its proposed modernization plan (estimated to cost Rs. 1000 crore) without recourse to budgetary funds. The expansion project was to include the setting up of a cold rolling mill, expansion of captive power generation and modernisation of existing facilities. This would have allowed the corporation to improve its profitability and increase the dividend it pays to the exchequer.
 
To quote the Disinvestment Commission: "BALCO as a PSU has suffered from procedural bottlenecks and lack of managerial autonomy. The CRM project at Korba has been cleared after 8 years with near-doubling of the capital outlay. The company was not able to get clearance from the government for setting up 100% captive power generation. As a result, the company had to depend on high cost power from the state electricity board which resulted in avoidable cost increases. The delays and the lack of autonomy have certainly affected its operating profits which would have been much higher had it been able to implement these projects earlier."
 
Thus even the Disinvestment Commission's recommendation that the government should resort to a strategic sale of 40 per cent of BALCO equity can be seen as misplaced. What was required instead was a reorganization aimed at allowing BALCO the freedom to use its own capacity to mobilize resources to modernize, expand its captive power facility and raise its profitability further. In practice, as a prelude to the privatization process, in March 2000  the subscribed share capital of BALCO was brought down to Rs. 244 crore from Rs. 488 crore, by appropriating part of the Rs. 437 crore into the government's account. This was a clear indication that modernization and expansion was not even under consideration.
 
This implies that BALCO's profitability has been undermined by the government's own role in stalling modernization and expansion at Korba. Hence, the current profit performance of the unit cannot be the basis on which the future profile of profits is estimated. However, the tendency for Arun Shourie, the Minister for Disinvestment to emphasise repeatedly that profits earned by BALCO had fallen from Rs. 163 crore in 1996-97 to Rs. 25 crore in 2000-01, suggests that this stream of profits has entered into assessments of the future profile of profits that have been discounted to value the worth of the company. This amounts to consciously or otherwise squeezing the profits of a public sector unit, and then using that profit outcome to undervalue the firm.
 
Secondly, it is being argued, a direct valuation of BALCO's assets suggets that with an investment of just Rs. 550 crore, Sterlite is to get control over assets that according to some are worth around 10 times that value. In fact, officials from the power sector have argued that the captive power plant alone would cost more than the sum being paid by Sterlite. According to reports, a senior official has held that if Sterlite were to invest in a captive power plant of the kind owned by BALCO, it could cost as much as Rs. 1,215 crore. And this figure matters since the value of the plant at Korba (set up in 1988-89) is still substantial, since a thermal power plant has a lifespan of around 35 years. Further, the deal not only involves an immediate loss from the undervaluation of the controlling stake in the company and over its assets that is to be handed over to Sterlite. Once control rests with Sterlite, big buyers would be unwilling to purchase large chunks of the stock remaining with the government at even the price being offered by Sterlite, since that would give them little say in the running of the company. A 51 per equity sale at an indefensible price also undermines the value of the remaining stock that would be held by the government.