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.