The Complete VSNL
The loud and very public spat over VSNL does little to inculcate investor confidence in PSUs
The Complete VSNL
May 28
VSNL board decides to invest Rs 1,200 crore in Tata Teleservices. Pramod Mahajan says the decision makes "a mockery of the disinvestment process."
May 29
Mahajan threatens to move Company Law Board. Rakesh Kumar, government nominee on VSNL board, says decision was not unanimous, as claimed by the Tatas.
May 30
VSNL says Kumar didn't dissent or ask for vote.
May 31
Mahajan tells Tatas to backtrack on decision. Tatas say they will stick to decision.
June 3
BJP's Sunil Shastri and Jagdish Shettigar say "Tatas have set a bad precedent".
June 4
Arun Shourie defends VSNL sell-off, says colleagues' assertions betrayed ignorance of facts.
June 6
After meeting Advani, Shourie and Mahajan announce they have sorted out their differences.
On the evening of June 6, disinvestment minister Arun Shourie and communications minister Pramod Mahajan walked out from L.K. Advani's office, looking and behaving like long-lost brothers. Smiling Cheshire cat smiles, both announced they had no problems with each other over the newly-disinvested VSNL's decision to invest Rs 1,200 crore in Tata Teleservices Ltd (TTSL), and that disinvestment must go ahead without glitches. Given the public acrimony within the government ever since the VSNL board took the decision on May 28, many analysts took the camaraderie with a large helping of salt.
No one who attended the board meeting had expected the fiery fallout that rocked corporate India over the next few days. The mood was upbeat as the reconstituted board met for the first time. N. Srinath, director, operations, made a 21-slide PowerPoint presentation on the benefits of the TTSL investment, followed by deliberations. The board agreed to pick up a 20-26 per cent stake in TTSL. A sub-committee was formed to figure out the modalities.
So far a smooth run. That changed within hours, as an infuriated Mahajan said that the decision had "made a mockery of the disinvestment process". He suspended the government-nominated board member Rakesh Kumar, who had attended the meeting, and issued a show-cause notice to Yashwant Bhave, who had been absent. "The Tatas bagged 25 per cent of VSNL for Rs 1,439 crore and are currently in the process of shelling out another Rs 1,151 crore for an additional 20 per cent. But they are now mopping up Rs 1,200 crore from VSNL, thus reducing their acquisition cost by 45 per cent," said Mahajan. Within a few days, the controversy morphed into the same old story: disinvestment breeding deceit and diatribe.
While BJP Rajya Sabha MP Kirit Somaiya filed a suit against the Tatas, party spokesperson Sunil Shastri and convener of its economic cell, Jagadish Shettigar, denounced the decision "that defeated the spirit of disinvestment". "The Tatas have set a bad precedent, sending wrong signals to businessmen with ulterior motives," says Shettigar. He fears, in future, private managements may freely siphon off funds after sell-offs instead of fulfilling their primary objective of improving efficiency of the PSUs. Kumar shot off a letter to VSNL's company secretary, challenging the unanimity of the board's decision: "The fact that I...had raised various objections at the time of the presentation have not been reflected in your reporting to the media and perhaps the stock exchange." He also claimed that he was not given sufficient time to study the agenda papers.
Clearly, it's time to examine facts and answer the key questions.
Was Rakesh Kumar's dissent suppressed?
Members present at the meeting fail to recollect Kumar opposing the motion. Says Subodh Bhargava, independent board member: "Raising questions and seeking clarifications is surely not dissent. The very fact that we moved ahead to the next agenda item of fixing a sub-committee and informing the BSE reveals board approval. Had Kumar been in doubt, he could have asked for a note of dissent or a vote." He could have, as Kumkum Sen, senior partner in law firm Khaitan & Khaitan, points out, "asked for a deferment of the meeting if the agenda papers really reached him late". Kumar did neither.
Says another member: "It's obvious that the minister is pressuring Kumar. What he's saying is a pure white lie." The VSNL company secretary's reply to Kumar claims the agenda papers were faxed a week before the meeting. Says the letter: "There was no note of dissent from you nor did you demand any vote on any item.... The unanimous approval of the board in respect to VSNL's investment in TTSL as notified to the stock exchange after the board meeting, is factual and correct." In his letter to D.P.S. Seth, member (services), DoT, on June 4, VSNL MD S.K. Gupta revealed that Ratan Tata had invited Kumar to be a member of the sub-committee which he declined while stating he would be available for any assistance required.
Did the Tatas act illegally?
Despite Mahajan's threats to move the Company Law Board, the unequivocal answer to this question is No. According to Section 5.6 of the shareholders' agreement between the government and the Tatas, the government can veto decisions taken by VSNL on 16 issues, from disposal of land to licensing the company logo. But equity investment in another company is not covered in the list. The other operative clause in the agreement involves commitments made to any affiliate of the shareholders (TTSL an affiliate), which is not "on an arm's length and in good faith". That a transaction is not at "arm's length" and "in good faith" is notoriously difficult to prove, and Srinath's lengthy presentation to the board was aimed to convince the members that the investment was a valid one. The members seemed to have been convinced. The Tatas' decision, after Mahajan's diatribes, to expand the scope of the sub-committee to examine whether there is in fact a better investment possible for VSNL in basic telephony than TTSL also an effort in this direction. Since the only alternatives for this investment are the Tatas' rivals Reliance and Bharti, the sub-committee's decision is easy to predict.
In a bizarre show of incompetence, the government trotted out Section 372 of the Companies Act to prove that it can veto the TTSL investment. But Section 372 was rescinded in 1998! It was replaced by Section 372A, which gives the government no veto in the case of "a company established with the object of providing infrastructural facilities". VSNL and TTSL are infrastructure service providers.
What is, however, astonishing is that the shareholders' agreement does not give the government a veto on inter-corporate equity investments. "This is one of the first terms that you put in a shareholders' agreement," says a top corporate lawyer. "In effect, tomorrow if VSNL decides to invest in even Tisco or Telco, the government, the 26 per cent shareholder, will have no way to block it." If this is a case of oversight, it's an unpardonable one.
Did the Tatas act ethically?
"Legally, they are well covered, but prima facie it appears that other investment options like investing in basic networks of their own or Net telephony were not discussed. Even the valuation is under a cloud. Thus, it seems they did violate the spirit of corporate governance," says a former DoT official. Says Kaushik Dutta, partner, PriceWaterhouseCoopers: "The government still has a 26 per cent stake and since its board nominee lacked veto power, ideally the Tatas should have taken them into confidence." But the agenda note circulated to the members explicitly states: "The shareholders' agreement does not stipulate any particular restriction on the Board for transaction of matters relating to inter-corporate investment. However, it may be appropriate that this item may be considered in the Board where at least one nominee...of the Government...is present in the meeting." Many analysts believe that this is a fully adequate attempt at transparency and keeping the government informed.
Did the Tatas act in the best interest of VSNL?
The Tatas say yes. Says Srinath: "With VSNL's international long-distance (ILD) monopoly over, a customer interface is an absolute necessity." VSNL has nothing but a few gateways to carry overseas calls, a shaky assurance from MTNL and BSNL to route their traffic through it for two years and an ISP business that makes little money.Thus, it urgently needs to tap the retail base and invest in network rollouts. The moment ILD traffic is routed through the other private gateways, VSNL will take a huge hit. Says a senior Tata official: "Today, 87 per cent of VSNL's revenues come from the ILD business, but we have little or no direct touch with our customers. The TTSL investment will gain us access to the end consumer."
TTSL's plans involve investing Rs 8,247 crore by 2008 to provide basic phone services in seven states. TTSL hopes to build a customer base of 28 lakh by 2006. If VSNL does not invest in TTSL, feel officials, it would have to spend upwards of Rs 10,000 crore over the next five years to expand on its own.
However, analysts at Merrill Lynch feel that Rs 1,200 crore is too high a price to pay for a 25 per cent stake in TTSL. UBS Warburg too seems cautious. Explains its report: "The proposed investment is not expected to earn returns in the next 4-5 years...We have lowered our target price (for the VSNL share) from Rs 305 to Rs 214." However, UBS still recommends "buy" for the scrip.
Is the government acting ethically?
Mahajan, complain industry players, is the most unlikely champion of the PSU case. The minister had blocked VSNL's plan to get into basic telephony, national long-distance and cellular telephony, and delayed VSNL's ambitions to expand its ISP business. In each case, private players gained at the PSU's expense. When it became clear that the government would disinvest in VSNL, he got the company to pay Rs 901 crore as dividend to the government in November 2000, and then Rs 1,356 crore in February this year, days before the deal with the Tatas was signed. Clearly, the government was trying to extract whatever cash it could get out of the company before it was handed over to the Tatas. "It's a wonder the government left
Rs 1,200 crore for the Tatas to take out from VSNL," says a telecom executive.
Why has Pramod Mahajan taken on his own government and party colleagues?
Sources close to the Tatas mutter grimly about the whole controversy being just a manifestation of shadowy corporate wars in the hugely capital-intensive basic telephony business. There are only three industrial groups left in the sector: the Tatas, Reliance and Bharti. Rivalry is intense, fast rollout of the services is crucial and raising vast amounts of money quickly is critical. BJP insiders also hint at a strong anti-Shourie lobby inside the party, which may have gone into overdrive following rumours that the prime minister is considering Shourie as India's next finance minister. The VSNL fracas could be a lever to embarrass Shourie.
On the other hand, nearly every disinvestment case, from Modern Foods to Balco, has seen intense public debate, with charges and counter-charges flying thick and fast. This could be a natural process in a country waking up to new economic realities.
Whatever the reason behind the hullabaloo, it doesn't help the disinvestment programme. Indeed, private players will be even more cautious in the future when the government puts up PSUs on the block. As is clear now, the separation pangs could start even after the deal has been signed, the money has been paid and business, everyone has been lulled into thinking, is continuing as usual.