Sibal questions VSNL disinvestment
Mumbai March 22:
Nine years after Atal Bihari Vajpayee's NDA government sold a 25% stake in long distance telecom carrier VSNL to the Tatas, communications minister Kapil Sibal on Monday said the "disinvestment does not seem to be fair and transparent" and ordered a probe into the delay in demerging surplus land of 773 acres. Arun Shourie was disinvestment minister at the time.
Sibal's move came even as sources close to the Tata group said the proposed demerger of surplus land was stuck due to the Centre dragging its feet on the three options to separate the company's real estate assets spread across Delhi, Pune, Chennai and Kolkata. The board of Tata Communications had sent a proposal to DoT in 2005, but is said to be waiting to hear from the government, which now holds 26% in the company.
Tata Communications said: "Tata Communications welcomes any government process that hopefully will expedite the demerger of surplus land, which we have repeatedly requested in the best interests of the company and its shareholders. We categorically deny that Tata Communications or the Tata group has benefited or seeks to derive benefit from the surplus land."
Sibal ordered that a committee under the telecom additional secretary submit a report on the issue by the month-end. In a note to the telecom secretary, he said, "The strategic partner has enjoyed the precious government land without paying a single rupee for it."
"The way the issue of demerger of 773.13 acre of surplus land of VSNL was handled in 2002 and thereafter, not only the interest of investors...but also (that of)government seems to have been adversely affected." Sibal cited a May 2005 note from Milon Banerji, then the attorney general, that said the strategic partner — Panatone Finvest, a Tata Sons subsidiary — was "not interested in hiving off/demerger of the surplus land as is the event of status quo, (it) retains the entire land by paying only 25% of the value to the government." Sibal also cited Banerji's opinion that the "strategic partner is in default of discharging its legal obligations" set out by the shareholder agreement.
The issue of surplus land has plagued Tatas, India's largest corporate conglomerate, ever since it took over VSNL in 2002. The group now wants the government to speed up the process of separating the land from the company. The last communication it received from DoT was in August 2006. According to the shareholders agreement between Panatone Finvest and government, the surplus land is to be demerged into a separate entity. In the demerged entity, government and public shareholders (current as well as past shareholders who participated in Tata's 20% open offer) will have ownership and not the Tatas.
Tatas purchased 25% stake for Rs 202 per share in February 2002 and made an open offer for another 20% at the same price. This payout did not include the value of the surplus land. In other words, Tata Comm houses the surplus land without any ownership right. If demerger isn't possible, the shareholders agreement proposes open market sale of the surplus land with the proceeds going to government and public shareholders (current and past). Another alternative is to develop the land for commercial purposes, but only for IT and telecom parks. Such restrictions, say real estate experts, may find fewer takers and result in depressed valuations ultimately.
Although no formal valuation of the land has yet been undertaken, approximate estimates place it at Rs 10,000 crores — which is way above Tata Comm's market capitalization of about Rs 6,000 crore. The unresolved land issue has figured prominently at several board and annual shareholders meetings of Tata Comm. The uncertainty, as well the government's unwillingness to pump in equity, has been hurting Tata Comm's fund-raising plans. The company has been resorting to debt financing for its capex plans, which calls for an annual spend of $400-$500 million.
"Tata Communications does not benefit from the surplus land and has no interest in retaining it or delaying its separation from the company. In fact, the company has been seeking an expedited resolution to this issue which limits its options in raising non-debt funding. The government of India is in the process of evaluating various legal and financial alternatives to decide on the demerger process," said a company spokesperson.
While the Tatas say they have no problem with any of the three proposals, the group doesn't want to pay stamp duty and income tax as it does not benefit from the demerger or sale of the surplus land.
Another problem lies in the demerged entity mirroring the pre-disinvestment shareholding structure since there is no clarity on how to accommodate the American Depository Receipts (ADR) holders into the structure. At the time, ADR holders held 12-13% stake in VSNL. Shourie on Monday responded to Sibal's note by saying a very stringent clause was built into the agreement regarding the VSNL surplus land. "Whoever won the bid for VSNL would not have any right to dispose of the land and pocket the profits. Clauses were added that ensured that even if the demerger did not take place and government permitted sale of any portion of the land, the strategic partner would not get a share from the proceeds of sale on the 25% equity holding it had acquired in VSNL.
It would have had to pass the proceeds on to the government," he said. But after almost a decade, the government is yet to get a fix on how to deal with the land. The telecom department is in the process of appointing a consultant to suggest various options for handling the surplus land. While the bids were invited last month, the government will on Tuesday extend the last date to April 6 as it is yet to get a fix on all the legal and financial issues that potential bidders have raised.