Primitive
Accumulation through Privatisation:
The VSNL Experience
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.