Under the proposed scheme, the strategic partner for VSNL will be asked to buy 15 per cent of the company, and in turn will get full management control. Why 15 per cent, you could well ask, when in other PSUs the percentage of shares that the strategic investor bought (or has to buy) is much higher. Hindustan Lever bought 74 per cent of Modern Foods, investors in Indian Airlines and Air India have to buy 40 per cent, and for IPCL the figure is 26 per cent.

It can and will be argued that by allowing the strategic investor in VSNL to take over the company with a smaller shareholding, the government has actually benefitted it. By how much? The exercise is best done by putting a hypothetical value to VSNL, say, Rs 10,000 crore. So if a strategic investor buys 15 per cent, he gets control of VSNL by spending Rs 1,500 crore. If he was to buy 26 per cent, he would have had to shell out Rs 2,600 crore, thus making a "saving" of Rs 1,100 crore.

True, the case is not so simple. After all, if an investor pays Rs 1,500 crore for a 15 per cent stake, it's not necessary that he will pay Rs 3,000 crore for a 30 per cent stake, and so on. But even when you introduce various refinements, it is very clear that the government will get less money by selling just 15 per cent share to a strategic investor than it would if it asked the investor to buy more.

It's not as if the disinvestment department didn't think of this possibility, it's just that they paid more attention to other points. Under the Sebi takeover code, for instance, once any investor acquires 15 per cent of the shares of any listed firm, the investor has to make an open offer to buy another 20 per cent of that firm's shares from ordinary investors.(This does not apply to Modern Foods or Air India as they are not listed.) Once an investor buys 15 per cent of VSNL's shares from the market, he will have to make an open offer to buy another 20 per cent shares, amounting to a total of 35 per cent. If the government sold the investor 26 per cent, the investor could eventually have to buy 46 per cent of VSNL's shares. You don't usually need to own 46 per cent of a company's shares when the rest of the ownership is disbursed, you can control it with even a 35 per cent shareholding. The disinvestment department's argument was that this option (of 26 plus 20) would drive the price of VSNL higher. Or itwould ensure that only a very small number of companies would be able to bid for it.

The department also argued that once the strategic investor took charge, the price of VSNL shares would go up and the government could then gain by selling the shares of VSNL that it had left over. It is a fact that the price-earnings multiples of shares of privately run companies are anywhere between two to 10 times those for their equivalent public sector ones. Thus Nalco's PE was 5.3 in October versus the privately owned Hindalco's 9, and SBI's PE was 4.2 versus HDFC Bank's 41.9.

Unfortunately, it is not certain that share prices will go up dramatically once VSNL becomes a privately-owned firm. As soon as it is known that the government plans to sell its balance 10 per cent shareholdings, share prices are certain to plunge as the floating stock will increase dramatically. And who's to ensure that in the meantime the stock markets do not crash? The belief that the government could get a higher value by selling part of its stake in the stock market at a later date is by no means assured.

But what if one goes by the argument that if the strategic investor is forced to buy 26 per cent of VSNL's equity, the government will in effect be raising the cost of acquiring VSNL because the buyer will have to purchase another 20 per cent shares through an open offer anyway? It's possible, but why should that bother the government? Its main concern has to be to sell its shareholding at the highest possible price, transparently. If the number of buyers gets limited, so be it. Privatisation is anti-socialist. Why go about it in a socialist fashion?