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THE NATION: BALCO PRIVATISATION
Value Judgement
The Government wins the BALCO round on a correct
evaluation, though it is slammed on the ground of under-reporting of assets
By Sumit Mitra
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BEGINNER'S LUCK: But Shourie's
non-communicative attitude drew flak from both the NDA and the Opposition |
If
disinvestment in India's loss-making Central public-sector units calls
for some passionate advocacy, nobody fits the bill better than Arun Shourie,
the minister for disinvestment. Since he got the disinvestment portfolio
last year, the journalist-turned-politician stalked his quarries, a mixed
bag of some 50 PSUs (out of 246), with the privatising zeal of a Margaret
Thatcher. However, Shourie's first target, Bharat Aluminium Company Limited
(BALCO), was felled last week after an unexpected resistance. The Opposition
cried foul as the Government announced its decision to sell 51 per cent
stake in the profit-making company to Sterlite Industries, a non-ferrous
metal company, for Rs 551.5 crore.
The Opposition complaint focused on the company's
valuation. It was done by Jardine Fleming, the US financial firm, in a
four-month-long exercise. The company evaluated the 51 per cent shares
of the company at Rs 515.6 crore. It was not accepted by the Opposition.
Congress leader P.R. Dasmunshi accused the Government of having embarked
on a "pre-determined bidding" to favour a "pre-determined
buyer". Even Manmohan Singh, the architect of the 1991 liberalisation
process, questioned the evaluation process and accused the Government
of "crony capitalism". The matter was discussed for 14 hours
over two days in the Upper and Lower Houses, with 40 members participating
in the debate. The Government won convincingly by 239 votes to 119, but
the storm was powerful enough to keep the ruling alliance on its toes
for a week.
The evaluation of BALCO is crucial as it is
the first step towards pricing the shares of the 27 PSUs the Government
is planning to offload in the coming financial year. Shourie calls the
evaluation process "impeccable". In the case of BALCO, Jardine
Fleming, the global adviser, set a "reserve price" with the
caveat that lower bids would be disqualified. Shourie fervently defends
this method despite charges of non-transparency. He even acknowledges
his debt to Reliance Group Managing Director Anil Ambani who, he says,
suggested the reserve price be kept a secret till the bids were opened
since a leak could lead to all bids being clustered just above the baseline.
However, the reserve price, according to the
procedure employed in BALCO's case, is determined by the Discounted Cash
Flow (DCF) method in which the expected future earnings are discounted
at a fixed rate to arrive at the present value. In other words, if the
expected revenue of a company is Rs 110 in the next year, and the interest
rate for discount is 10 per cent per annum, its valuation in the present
year will be Rs 100. The DCF method of valuation is believed to be in
practice worldwide for investment appraisal in large manufacturing companies.
Its advantage over other methods, based on balance sheet assets, is that
it aims at gauging the company's future business potential rather than
the values locked away in past investments. Investment banking sources
say that the DCF method is particularly useful when the new buyer intends
to run the company instead of stripping it of its assets.
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GIVE ME ORE: Sterlite
Chairman Anil Agarwal was the highest bidder for BALCO |
Shourie stresses that BALCO was evaluated as
a "going concern", and not as a company headed for closure,
with its fixed assets measured at scrap value. "In selling a going
concern, you look at the rational expectation of future earnings, not
the assets to be recovered," he says. Jardine Fleming arrived at
a figure of Rs 412.5 crore by applying the DCF method. To this was added,
on the recommendation of an inter-ministerial group, another 25 per cent
as the "control premium", or the extra price the investor should
pay for obtaining full management control.
The DCF evaluation gave a higher figure than
those obtained by other methods, like:
Balance sheet method: it uses the net worth
of the company, or sum of its paid-up capital and free reserves and surplus,
as the basis of evaluation. Following this, the evaluation of the 51 per
cent of the company stood at Rs 320 crore.
Comparable valuation method: based on average
earning of the shares multiplied by the average price-earning multiple
of the industry sector. By this method the reserve price was worked out
at Rs 375 crore.
The Opposition's grouse is that BALCO sits on
rich assets, including a 270 MW power plant, that were sold cheaply. Perhaps
to guard against such criticism, Shourie got the adviser to conduct a
quick asset evaluation. It set a value of Rs 1,070 crore for the entire
company, or Rs 545.7 crore for the 51 per cent shares sold. With control
premium added, the valuation then could well have been a much higher Rs
682 crore. That would have led to the cancellation of Sterlite's bid.
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