In a
surprise move, the board of directors of recently privatised Videsh
Sanchar Nigam Ltd. (VSNL) announced on May 29 that VSNL would use Rs. 1200
crore of its reserves to buy at par an equity stake of 20-26 per cent in
Tata Teleservices. The decision is proving controversial for a number of
reasons. To start with, despite the government still being a major
stakeholder in VSNL, the ministry of communications and informational
technology, the nodal ministry for the industry, was obviously unaware of
the fact that such a decision was to be taken.
Secondly,
there is no clarity on the question of whether the board of VSNL took the
decision unanimously or whether one of the government nominees on the
board, Mr. Rakesh Kumar, senior deputy director general in the department
of telecommunications, who was present at the meeting, had dissented.
Spokespersons for the Tata Group claim that it was a unanimous decision of
the board. Having been informed similarly, the ministry was allegedly
planning on asking the two government nominees to step down. But Mr. Kumar
himself has reportedly written to VSNL protesting against the statement
that he had gone along with the decision and objecting to the inadequate
notice provided regarding the date and agenda of the board's meeting.
Finally,
there is disagreement between the ministry of communication and
information technology and the ministry of disinvestment on whether the
VSNL board had the right to take such a decision, and whether, if it did,
it was an appropriate decision in keeping with the spirit of the
shareholder's agreement signed after disinvestment.
The
controversy points to a fundamental flaw inherent in the process of
“strategic sale” used to privatise companies like VSNL. Strategic sale
involves handing over full management control of a public sector entity to
a private partner, in return for purchase of as little as 25 per cent of
equity through a bidding process. Bids are evaluated taking into account a
“reservation price” for each share, arrived at by the government through
an evaluation process that is neither specified nor transparent. The
controversies that have surrounded such divestment moves in virtually
every public sector company hitherto privatised, indicate that there is
considerable public and technical scepticism regarding the price at which
government equity in and control of public sector corporations is being
handed over to the private sector.
The
government has often justified the sale price by pointing to the fact that
it is significantly higher than the market price at which small lots of
shares of these enterprises, that had been previously sold, were being
traded in market. This, of course, is inevitable since the prevailing
market price is a floor below which purchase prices cannot fall,
especially since the buyer in a strategic sale transaction gets a block of
shares and management control. Sceptics would also argue that this price
differential helps win small shareholder support for the new management,
since these shareholders benefit from a sudden rise in the value of their
shares.
What is
noteworthy is that in instances where the process of marginal divestment
had resulted in a substantial volume of small private shareholding, the
price differential in a strategic sale transaction helps the purchaser
acquire a much larger block of shares than the government has parted with.
SEBI guidelines require that any private party acquiring a controlling
block in an enterprise would have to make an open offer to acquire the
shares of any minority stakeholder at the same price, and since that price
tends to be above the market price, the successful bidder most often ends
up with a much higher share in equity than that originally acquired. This
results in a situation where management control by the purchaser is backed
by the material strength that a large shareholding stake, and constant
dominance of the board of directors, provides. In the case of the Tatas,
since they acquired through their open offer an additional shareholding 20
per cent of total equity, the group's current shareholding in VSNL is
placed at 45 per cent.
This
dominant stake gives the acquiring entity the ability to manage the
company according to its discretion. Such discretion would extend to the
management of any surpluses generated by the divested firm or any cash
reserves that have accumulated with it in the past. The possible misuse of
such discretion was obviously considered by the government, since it
included a clause in the shareholders’ agreement requiring an affirmative
vote from government nominees, if sums above a certain floor value were to
be lent by the company to entities that do not fall in areas which are
part of its “normal business”. In the case of VSNL that floor had been set
at Rs. 50 crore.
However,
the recent board decision does not violate that virtually toothless
clause, since what is involved is a decision on inter-corporate investment
(not lending) and since Tata Teleservices, in which it seeks to make the
investment, holds basic telephony service licences for six circles in the
country. As fixed phone lines are the principal medium through which
VSNL's business of providing international long distance (ILD) services,
which account for 87 per cent of its revenues, is delivered, Tata
Teleservices can be legitimately considered a firm that falls within the
area of VSNL's “normal business”. In fact, both VSNL spokesmen and those
of the parent Tata Group have described the decision as crucial for the
viability and survival of the company, since the liberalisation of
National Long Distance (NLD) and ILD services have put it in competition
with a number of integrated telecommunication service providers. The
acquisition of Tata Teleservices would allow VSNL to integrate with TTSL's
customer base, it is argued.
The
Tata's are quite forthright. They have a large controlling stake in VSNL
after privatisation. They therefore have a right to dominate the new
board. And the board's decision reflects good corporate strategy. All this
would carry water if TTSL had not been a Tata group company and if the
reserves in question had not been accumulated prior to privatisation.
Looking back privatisation, while not increasing the “efficiency” of VSNL
as a service provider, as any internet buff would vouchsafe, was a free
gift of the state's capacity to garner profits from telecommunications to
the Tata's.
Tata
start-up TTSL reportedly has plans to make investments totalling Rs. 8247
crore in basic telephony over the next four years, of which Rs. 4,352
crore is to be financed with equity. As per current plans the Tata group
would be contributing Rs. 2,552 crore, giving it a clear majority stake,
VSNL an additional Rs. 1,200 crore and the balance of Rs. 573 crore is to
come from non-Tata sources. What the VSNL board's decision does is it
allows the Tata group to directly hold a controlling stake in TTSL, as
well as finance the equity required by such a large investment in a manner
in which the other significant shareholder would also be a Tata controlled
company. Over time, as the new company establishes itself, this would
raise the value of the direct Tata stake enormously, a significant part of
which can then be divested for a profit without fear of losing control
over TTSL.
We must
recall that prior to VSNL's disinvestments, the government got VSNL to pay
out a dividend of 500 per cent, through which, given its 52 per cent
equity holding, it mopped up Rs. 741 crore of the company's reserves. The
total dividend VSNL would have paid out at that time would, based on these
figures, have amounted to Rs. 1,425 crore. In addition VSNL was made to
pay out a special dividend of 750 per cent, which gave the government Rs.
1,111 crore. Here again, the total dividend paid out by VSNL would have
been Rs. 2,136.5 crore. In this manner, VSNL was stripped of Rs. 3,561.5
crore of cash reserves prior to privatisation. Add to this the Rs. 1,200
crore that VSNL is investing in TTSL and the total works out to Rs.
4,761.5 crore, which is more than the total equity capital of TTSL. That
is, without resorting to strategic sale the government could not only have
retained control of a profitable telecom major like VSNL, but could have
through its own investments integrated with the consumer. With hindsight,
the government's decision not to give VSNL a basic services licence was a
way of preventing it from exercising this option, perhaps forged by the
decision to hand the firm over to the private sector.
Using
inter-corporate investment as a means to ensure corporate control at low
cost is a technique which is used the world over and has been especially
common in India, where the representative unit of large capital is not a
single giant corporation, but a business group. Since the group consists
of a large number of legally independent companies controlled by a single
decision-making authority in the form of the extended family or “business
house”, inter-corporate investments have always been an important means of
corporate control in the country. However, such investments are financed
from the group's own kitty, making it a legitimate beneficiary of any the
value enhancement that accrues to shareholders as a result of expansion
and diversification into new areas. What the specific history of VSNL
shows is that privatisation makes it possible to make such investments and
garner those gains with public money.
The VSNL
board's decision has not just allowed the Tatas to use the inter-corporate
investment-for-control technique, but to do so with reserves accumulated
by an acquired company prior to acquisition. This reduces costs of control
further. To acquire control control over VSNL the Tata's no doubt had to
pay a price. The group had acquired the 25 per cent stake in VSNL it
bought from the government at Rs. 1,439 crore. It had paid out another Rs.
1,151 crore for the additional 20 per cent stake it bought through the
open offer route. But in the process it gained control of that part of the
accumulated reserves of VSNL, which the government had not siphoned out
prior to disinvestments. As a result, it has, in the first instance been
able to convert Rs.1,200 crore of public money into its own money, as it
were, and use it to finance an investment, which ensures that it directly
and indirectly controls a large stake in TTSL that promises huge financial
benefits in future. Another way of looking at it would be to say that,
since the group has access to Rs. 1,200 crore of ‘free money’, it has in
essence paid only Rs.1,390 crore, and not Rs. 2590 crore as appears in the
books, to acquire a 45 per cent, controlling stake in a telecommunications
major like VSNL.
Obtaining
money ‘for free’ to finance private capital accumulation, through plunder
of or unequal exchange with precapitalist economic formations, including
in the colonies, was regarded by Marx as one aspect of the process of
primitive accumulation in the early phases of capitalist development in
the metropolitan centre. Lacking access to such spaces for plunder or
markets to denude, capital in ex-colonial, late industrialising societies
had to rely on the state as a means to undertake such accumulation at the
expense of the rest of the population. In the past, Indian capital has
indeed used its influence on government to obtain protection and favours
of a kind that allowed them to accumulate surpluses with little effort and
at small expense. This was attributed by advocates of liberalisation to
the rent-seeking behaviour typical of regulated regimes, and decontrol and
deregulation they argued would do away with such tendencies that promote
inefficiency. That is clearly wrong. What the VSNL decision and its
implications illustrate is that there is little that is truly transparent
about liberalisation, nor is there any gain in terms of a break in the
nexus between capital and sections of the state. What liberalisation seem
to have done is to just increase the gains that members of that nexus can
derive, since now the huge assets accumulated over decades by the state
with public money can be “legitimately” put in the service of the private
sector.
