Shourie speaks: part 2

The second part of the interview with Arun Shourie, India''s Minister for Disinvestment.

Is there a situation in India where more of the privatizations tend to be favour domestic institutions/buyers rather than foreign ones?

We're aiming for international competition in some of the enterprises. For instance, in the case of the petroleum distribution company called IBP, which has 6% share of the retail market in India, Shell and Kuwait Petroleum were among the bidders. In the case of an aluminum company and a zinc company, Sterlite, a British company [owned by an Indian settled in Britain], was among the bidders. We welcome foreign participation. Foreigners have also to become less sceptical and have greater confidence that the process will be seen through.

But in the case of Sterlite, wasn't it a highly political situation?

In the first instance there was an aluminum company called Bharat Aluminium Company (Balco). Sterlite bid for that in May 2001. There was a lot of noise and there was a strike as a result of which the plant was closed down for nearly a week. I simply refused to negotiate and requested the Prime Minister to do likewise. I did not negotiate because it was completely politically motivated and a strike led by political parties. Eventually the plant resumed operations. The enterprise is working well now.

Sterlite then went on to bid for Hindustan Zinc Ltd. (HZL), our main zinc company. We were well received by the workers when we went to visit the HZL's factory. Actually it's very important and similar to the miners' strike in UK. India will have to face and it is facing up to these politically motivated or politically instigated strikes.

So do you think that Balco was as significant as the miners' strike in the UK?

The miners' strike in the UK was much more cohesive and labour unions had a much greater influence on British politics than the unions have in India today. The organized labour class in Britain is in very high proportion to the total labour force, whereas in India it is 4% to 5% of the total labour force. It's not comparable. It's not as decisive enough an outcome as the miners' strike. That would be if all government employees in India went on strike and the government stood firm for two months and failed to come in line.

In privatization it was an important step. The same workers took us to court. We've had 19 challenges in court. And in Balco, apart from the strike and others, they took the matter to the Supreme Court of India. The Supreme Court gave a very detailed and ringing endorsement of the procedures that we had followed and instituted. The Supreme Court judgement then helped us a lot in subsequent transactions.

Are there any specific criteria required to be met by the bidders in the privatization process?

There were a lot of controversies raised about individual bidders. When it becomes known that a company is going to bid for a particular asset, inter-corporate rivalry is such that the other companies indulge in a mud-slinging match and whether it's Reliance, Sterlite or Tatas, all of them are guilty of that. We formulated guidelines on who would be disqualified from a bidding process. These guidelines were approved by the Cabinet and subsequently published. Every one who expresses interest in participating in the bidding process is first sent the set of guidelines. Broadly the guidelines are as follows:

If it's an offence related to the security or integrity of the country then a mere charge sheet by an agency of the government or by court of law is enough [to disqualify the bidder]. And not just an enterprise but the entire group would be disqualified from bidding.

If it is a non-security related offence, i.e. an economic offence such as tax evasion or stock manipulation, then a charge sheet would not suffice. There must be a conviction by court of law or an adverse order by a regulatory authority but on a matter, a crime which is so grave as to outrage the moral sense of the community or disable the bidder from running the enterprize should he become the winner. For instance, the regulatory authority may say that Sterlite is debarred from accessing the capital markets in India for two years because of some misrepresentation. But Sterlite will counter saying that it can run HZL and expand it because it has US$500 million of reserves. If Sterlite cannot access the Indian market it will access the GDR market and raise funds. It doesn't fall afoul of the country.

That is why in the case of the Indian Petrochemicals Corporation Ltd. (IPCL) privatization, there was a strong pressure from politicians and others to disqualify Reliance from bidding for IPCL. I refused to bow down because it was not an security offence just because there are three officials of Reliance being investigated for breach of the Official Secrets Act.

Are these guidelines also applicable to the advisors to the government?

Financial advisors are the eyes and ears of the government. When they're implicated in any of the offences, an adverse order by a regulatory authority is enough. And not just a legal entity but the advisory group as a whole gets disqualified. They have a fiduciary status vis-a-vis the government and therefore we cannot take risk. I am accountable to the parliament and if a regulatory authority has implicated CSFB in a stock fraud, I cannot rely on such an organization for advice.

But CSFB are still debarred and yet they advised you on the VSNL privatization?

Yes actually CSFB in the end was not debarred and they appealed against the order. They were barred from secondary market trading by SEBI.

But presumably you were saying before that if there is any security violation then that bars any part of the entity?

It has to be a grave enough offence. Under SEBI regulations, submitting delayed information is also an offence, stock manipulation of the recent kind is also an offence. So it's important to find out whether a particular offence fits into the two categories mentioned before. And on that area it is up to the government to judge.

But to this date CSFB can't actually trade in India. It's been over a year since SEBI gave its order barring CSFB, and it is still pending a verdict in its appeal.

It concerns SEBI and not our ministry. The secretary of the Department of Disinvestment would be able to throw more light on that and provide you with correct and updated information.

What is the primary purpose of the privatization in India? Is it one that believes that enterprises are better run by the private sector or is it to raise money?

It is the better utilization of national resources that are locked up in these enterprises. And that is visible in the case of Modern Foods, the first privatization. One-and-a-half-years after we privatizated it, the most recent quarter's sales are 94% higher than the same period last year. Not a single worker was fired.

So it is to unlock the productive potential of these companies and that's what is also seen by the market. The stock market rally in India in the last three months has been led by governmental stocks, which were dead stocks. And the valuation of these governmental stocks has increased by about 75% in these three months. We have confidence now. We will pursue this programme and the enterprises will be different enterprises.

Year-to-date the market capitalization has gone up by about $34 billion in state-owned enterprises, i.e. about 77%. And if you look at the BSE Sensex, it has actually increased by about 14% -15%. So the out-performance is tremendous.

Going back to labour issues - this is a major concern not only in India but also in China, where the government is saying that state-owned enterprises phase out lay-offs and joblessness. Obviously it's the same situation in India too?

There is a big fear in the minds of people. In China everything is state-owned. In India its not. There's a big difference. In cases where we unlock the productive potential in these enterprises and the rest of the industry grows because of that there would be enough room to absorb this minuscule amount of labour. Secondly, in each share purchase agreement, we provide that there shall be no retrenchment at all for one year. Even after that retrenchment requires a very elaborate procedure under existing government laws. Thirdly, if at any stage the enterprise decides to downsize, it must have in place a voluntary retirement scheme (VRS), which is at least as generous as the one that prevailed at the time of privatization. We are certainly encouraging all the successful bidders to not get into trouble with labour and to absorb them by expansion. And I'm quite confident about the large enterprises.

Has this gone down well with the bidders, especially if you include these clauses in the share purchase agreement?

It is in the interests of the bidders to work with the staff. If they run into discord with their workers, they would just be harming themselves. The shareholders' agreements are discussed with the bidders, in each instance, over three to four months. There are seven to eight drafts and redrafts that the document goes through. In the end they realize that this is necessary.

Some newspapers are saying that certain families are getting richer and richer by buying these assets. How political an issue is that?

Not really. There are politicians who are made to write letters by corporate rivals who will make these allegations about some families. Then this family will get other politicians to write letters in its favour.

You've made a lot of progress in the privatization process recently but the perception outside India is that the process has been painfully slow. How do you keep up the momentum of the process going forward?

One is to persevere. Secondly, when the benefits become visible to workers and to people in general as has happened in the enterprises that were privatized just over a year ago. Thirdly, the provincial governments are now also beginning to privatize. These governments are in the hands of different political parties that are not in power at the Centre. When they privatize it will certainly become very difficult for those parties to then block things in Delhi.

So you think that disinvestment would continue even if there is a change in government?

Yes because circumstances are dictating this. They also compel governments to do it because the budgetary situation of the central and state governments is now grave.

What are the next big assets that you are looking to sell?

The Shipping Corporation of India will be privatized in July. National Aluminium Company (Nalco), Bharat Petroleum Corporation Ltd. (BPCL), Hindustan Petroleum Corporation Ltd. (HPCL) and some very good consulting companies such as Engineers India Ltd. , RITES Ltd. and Mecon Ltd. that are specialists in petroleum, railways and steel respectively. And at least in one of them I would hope that I can ensure an employees buy-out.

In the case of Nalco, the aluminium manufacturer, will there be a share offering or trade sale?

The government holds 87% stake in Nalco while the rest is with financial institutions and private investors. Up to 30% will be sold first û about 10% in the domestic market and 20% through ADR. Then we will look for a strategic partner and bring down government equity to 26%. It is a very big company and easy to take to the New York Stock Exchange.

Is there any reason for the government to keep 26%?

According to Indian Company Law, there are certain affirmative votes that are required if you have 26%. It is a transitional thing to assure labour that government is still there.

With 26% you can still control the board?

It's not controlling the board but things like prevention of stripping of assets. Certain things cannot be done without the affirmative vote. In certain cases, as in IPCL, only 26% has been sold but management has been handed over management control.

Who is managing the Nalco sale?

The Nalco advisor is not yet invited. There was a meeting with the Minister of Mines. The bidders requested us not to hire the same advisor for the entire process. There are three distinct things to be done û an offering in India, an offering in New York and selection of the strategic partner. Different advisors have different competencies. I had felt that if an advisor invests in learning about an enterprise then try and build in those qualifications, which would give us the same advisor for the entire process. I had the meeting with the Minister for Mines and there were three to four bids that came in for the advisory role.

What's the reserve price in terms of what you need to achieve in terms of making the sale happen?

That will be done by the advisors based on four different types of valuation û discounted cash flows (DCF), asset valuation, etc. In the case of strategic sales, we do two exercises. The valuations are done but not completed. The bids are invited and kept sealed. Then the reserve price is calclulated and the bids are opened. If the reserve price gets known then the bidders tailor their bids accordingly. On the other hand, if the bids become known, the advisors, because their fees depend on the success of the transaction, will tailor the reserve price to be influenced by the bids.

What will be the size of the ADR?

I have not worked on that yet.

So this will take place before the end of year?

If I give you a date of September and another calamitous event like '911' happens then I will not be able to control the timing of the sale.