The Hindu : Crossed connection — controversy over VSNL

Online edition of India's National Newspaper
Saturday, Jun 01, 2002

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Crossed connection — controversy over VSNL

By C. R. L. Narasimhan

There has been good and bad news on the post-disinvestment front.

The progress on the disinvestment front has been swift recently. The Government could attempt big-ticket public sector enterprise sale without being bogged down by controversy. Proposals pending for some time such as those of Maruti and IPCL were completed recently. A few significant PSE privatisations have taken place earlier — CMC, HTL, VSNL, Hindusthan Zinc, a number of hotels under ITDC and Air India. The disinvestment programme has been cited as one bright spot in a generally lacklustre economic policy scenario.

Is it possible that certain negative publicity concerning a divested PSE — months after a new management has taken over — take away some of the gloss? Recent reports concerning VSNL suggest that they would. The country's long-distance telephony operator was handed over to the Tatas after an elaborate process that culminated in a bidding. The VSNL's board was reconstituted to reflect the new ownership.

The Government which has a 26 per cent stake still has its nominee director on the board. Under the strategic sale method, the management of the PSE is handed over to the strategic buyer, who buys the block of shares put up for sale by the Government. Additionally, the buyer has to make an open offer to at least 20 per cent of the remaining shareholders at the same price.

The handing over of VSNL to the Tatas was considered momentous in other ways too. Tatas have long range ambitions in telephony and already have a presence in the domestic segments.

VSNL had a monopoly over international long distance telephony until the beginning of this financial year. Competition is bound to come in the near future. The Government has set easy norms for new players to qualify. A number of them, including those having a solid presence in cellular and basic telecom segments of the domestic market, players such as Reliance and Bharti are set to enter the ILD business.

The new board at VSNL last week authorised a Rs.1,200 crore investment in Tata Teleservices. Apparently, the Government's nominee did not object.

But the Union Communications Minister has raised objections on the grounds that the Government was not consulted on so major a decision. Besides, money flowing into a group company comes from the cash reserves of VSNL. According to some that suggests "asset stripping.''

The controversy has a few dimensions. In a strict legalistic sense there seems to be no bar in VSNL investing in a company. The Government was represented at the meeting which decided. Further there is nothing in the shareholders' agreement entered into before the privatisation between the Government and the Tatas that invalidates the investment. That is the view of the Disinvestment Ministry which says that the decision is well within the competence of the new board.

Still, the Government continues to be a huge stakeholder and the new investment goes to a Tata group company.

These are points that have given rise to the controversy. In the interests of all the shareholders of VSNL it would have been preferable if there was no controversy.

As old habits die hard, it would have been ideal if the Ministry was consulted even though VSNL might technically be under no obligation. The next dimension is in fact the more crucial: Does the investment make business sense for VSNL and all its stakeholders?

Looking at the future of international long distance telephony business, from which VSNL derives almost 88 per cent of its revenues, there is a need to build a customer base from among the domestic basic telephone operators. BSNL and MTNL, still in the public sector, have agreed to route their calls through VSNL. But with aggressive competition on the anvil, it will be naive to rest on historical connections.

Building a new client base makes sense. It diversifies the risks. Tata Teleservices is in basic telephony. VSNL by acquiring approximately 25 per cent stake in it is preparing for the future. In the alternative, VSNL can build a basic telephone network and have a "captive'' clientele but that will take a long time and plenty more money than buying into a basic operator. What if the company in question is a group company? However, it looks as though the parties involved need to refurbish their image through a better communication strategy. The most crucial determinant is the commercial viability of the investment decision. As for the disinvestment process, this ought to be another learning experience.

How long after a PSE is divested should the ministries have a say even if that is not legally needed? Coincidentally while the VSNL controversy is raging, there has been good news concerning Balco, whose divestment has been the most contested till date. The Chhattisgarh Government under Ajit Jogi opposed the strategic sale tooth and nail, instigating the employees only to backtrack in the end. Last week a memorandum was signed between Balco and the State Government facilitating a Rs. 6,000 crore expansion. Obviously, not just the companies but public policy too can change unexpectedly after privatisation.

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