Back to the future

Written by Sourav Majumdar | Updated: Feb 13 2002, 05:30am hrs
Last week, in a flurry of activity, the government showed its intent on pushing through a series of big ticket reforms. In a single day, a slew of initiatives were announced, with two major divestment proposals being cleared and the cabinet also giving the go ahead to a wide range of others, including a voluntary retirement scheme for government staff, sugar decontrol, a new pharma policy and a reworking of the items under the Essential Commodities Act. But perhaps the biggest reform, and certainly the most talked about, was the divestment of Videsh Sanchar Nigam Ltd and IBP Ltd.

These two proposals had been hogging newspaper headlines for several months now, with stories doing the rounds of the bids and related possibilities. But for those who have been keeping track of developments, the divestments came after weeks, indeed months, of frenetic activity and hard nosed bargaining between the disinvestment ministry and the Securities and Exchange Board of India. The discussions between disinvestment secretary Pradip Baijal, Sebi chairman DR Mehta and the Sebi board, about the nuances of post-open offer pricing actually held the key to how the financial markets would view this key phase of divestments. But all credit to disinvestment minister Arun Shourie: he has, indeed, undertaken a number of associated reforms even while pushing through divestments firmly.

Take for instance the crucial issue of whether a public sector bidder is required to make an open offer for another 20 per cent, assuming it wins a bid. Earlier, India Inc had been crying foul about the exemption granted to public sector undertakings as part of the takeover code, owing to which the entire concept of a level playing field in disinvestments where PSUs were contesting with private players was in danger of being abandoned. This paper had also reported this issue, pointing out how private sector companies would, from the very beginning, be at a disadvantage if the exemption granted to PSUs from making open offers after winning a divestment bid was not reviewed. IBP itself was cited as a clear case where this problem would arise. Mr Shourie has once again underscored his commitment to reform and the divestment process by ensuringtogether with Sebithat this strange and rather archaic clause was abolished. Consequently, you now have a situation wherein the minority shareholders in IBP are reaping the gains of the healthy bid price of Rs 1551.25 per share put in by the winning bidder, the state run Indian Oil Corporation. Had this change in law not been undertaken before this divestment, it would have made the entire process a mockery, doing precious little for small shareholders.

The second, and equally important, change was the crucial alteration in the open offer pricing for divestments. After much deliberation, the disinvestment ministry and Sebi hammered out a workable solution to the problem of what the post-offer pricing should be. The case of CMC Ltd, where the price which the Tatas paid to the government was far lower than the open offer price, proved to be the catalyst. Sebis new formula has the post-selloff open offer price as the higher of either the bid price or the average of the 26-week highs and lows taken from the day preceding the date when the bids are opened. This way, shareholders gain, since the higher of the two prices is paid in the open offer. Also, no ramping by disgruntled bidders is possible, since no one knows whos winning the bid till the cut-off date. This change has led to a virtual windfall for shareholders in both the VSNL and IBP divestments.

After the Balco debacle, I have been asked several times whether the divestment process would ever recover from the trauma of a selloff mired in controversy. But slowly and steadily, the government has displayed the resolve in pushing through divestments, including the big-ticket selloff like the ones witnessed last week. And all this, without any major resistance. You now have the House of Tatas picking up a sizeable chunk in VSNL, and IOC taking IBP and both selloffs being followed by stockmarket frenzy. Look at it as a celebration of the freeing of the Indian marketplace and the fact that the divestment process has, despite all the hiccups, now begun gathering pace in a major way. One now hopes that, bolstered by this success, the government and Mr Shourie will be emboldened to move quicker with divestments in the coming days.

There have been some murmurs of protests, however, with the fact that PSUs have now been kept out of the forthcoming HPCL and BPCL divestments. Some feel that the government, having allowed PSUs to bid in the selloff process in the first place, now has no business to play bully and keep them out in the name of monopoly. But thats altogether another matter. After last week, its clearly Advantage Shourie on selloffs. And for a change, lets not look at the figures or how far away the target is. Its the intent which tells the real story.