Apex court orders regular CBI probe into 2002 disinvestment of the mining company; Vedanta not to exercise second call option
The Centre can now go ahead with its long-thwarted plan to exit Hindustan Zinc (HZL), with the Supreme Court allowing it to sell its residual 29.5% stake in the Vedanta-controlled integrated mining company in the open market “since it already ceased to be PSU”. However, the court found sufficient material for registration of a regular case by the CBI into the government’s 2002 sale of 26% stake in the company, along with management control to Vedanta, given the various allegations of irregularities in the bidding process and the valuation that preceded the disinvestment.
The HZL stock shed 2.9% on the BSE on Thursday, worse than a 0.6% fall in the Sensex.
The government’s residual stake in HZL is worth around Rs 40,000 crore at current market prices.
The 2002 disinvestment facilitated subsequent sale of controlling stake to the Anil Agarwal-led ultinational mining-to-metals conglomerate. While allowing the government to sell the residual stake in the open market, the court took note of Vedanta’s submission that it wasn’t planning to exercise its second call option under the share purchase agreement.
The CBI had in its closure report after a preliminary enquiry (concerning the 1997-2003 period) had stated that it found nothing “incriminating” or “illegal” or any “undervaluation” in the acquisition of shares by Vedanta (then Sesa Sterlite) in April, 2002.
Via Sterlite Opportunities and Ventures, Vedanta now holds 64.92% in HZL, thanks to its acquisition of another 20% from the open market through mandatory open offer immediately after the initial stake purchase and the first call option exercised in August 2003 for another 18.92% stake.
The ordering of a regular CBI probe by the court into the 2202 stake sale is blow to the ruling dispensation as the process was presided over by the then Atal Bihari Vajpayee-led NDA government. The disinvestment commission in its sixth report of December 1997 had categorized HZL as a “non-core PSU” and had recommended its disinvestment, but not beyond 25% of the equity, in order to retain government control. Also, the advertisement inviting ‘Expressions of Interest’, was allegedly confined to the sale of 26% equity and did not mention a road-map for a complete sale of the company.
A Bench comprising justice DY Chandrachud and BV Nagarathna took objection to the closure of preliminary inquiry by the CBI and said it was “our considered opinion” that the disinvestment of 26% stake in HZL by the Union Government in 2002 “evinces a prime facie case for registration of a regular case.” The apex court directed the investigative agency to periodically submit status reports every quarter or as otherwise directed by it.
The government had in the fiscal 2013-14 planned to raise at least Rs 15,000 crore through sale of residual stakes held in HZL and Balco.
Vedanta Resources had acquired the majority shareholding of the two companies in the previous NDA regime in 2003. The Union cabinet had approved a stake sale in Hindustan Zinc in 2014, the National Confederation of Officer’s Association, an employee union, approached the SC seeking a CBI probe into the alleged irregularities in HZL’s stake sale to Vedanta Ltd (earlier called Sesa Sterlite Ltd) in 2002. The association alleged that Vedanta picked up a majority stake in the PSU at an undervalued price, resulting in estimated losses running into hundreds of crores to the exchequer.
The SC in its Thursday’s judgment noted the Union government’s stand that the residual shareholding of 29.5%, hall be offloaded in the open market so as to strengthen revenues for public purposes and shall take place in accordance with the Sebi rules and regulations to ensure that the best price is realized for the sale of the shareholding.
The CBI in its July 2020 status report had given various recommendations along with a ‘self-contained note’ of March 2017 detailing the closure of preliminary enquity. According to the CBI report, the discounted cash flow method for valuation, relied by untraceable officials of BNP Paribas, was allegedly chosen on March 22, 2002, without any justification, in spite of the first report of the Disinvestment Commission recommending the ‘asset valuation method’, in case of a strategic sale.
An Asset Valuer for the valuation of the fixed assets was appointed any competitive/ limited bidding advertisement, which was allegedly against the Union government’s policy, it said, adding private DCF valuers without any requisite expertise “allegedly failed to consider goodwill, technical know-how and various assets of HZL” “Allegedly, if the valuation had been conducted properly, on the basis of DCF method, the value would have been over Rs 1,000 per share,” the CBI said.
It may be noted that Sterlite in the second tranche of the disinvestment in 2002 had picked 26% of the government’s shareholding in HZL at Rs 40.51 per share, aggregating to around Rs 445 crore. The Comptroller and Auditor General’s in 2006 had also indicated the undervaluation of the assets. The CAG’s report stated also that the subsequent sale of an 18.92% equity to Sterlite in 2002 at the old rate of Rs 40.51 per share, was not in line with the share purchase agreement, as the prevailing rate then was Rs 119.10 per share, resulting in a loss of about Rs 650 crore.