Balco - The Disinvestment Story

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Stage II: The Controversy Deepens Contd...

Analysts felt that the GoI got a good price for the 51% stake sold to Balco. Said Roddy Sale, managing director and head, investment banking, J.P.Morgan, "Sterlite followed every rule in the book and was willing to pay a substantial premium to regular valuation." BusinessWorld wrote⁷, "Also remember, Hindalco was willing to pay only around half the amount Sterlite is willing to put up, while the overseas companies backed out altogether. That alone should be enough to make Jogi and company embrace Agarwal warmly."

Stage III: The Debate Meanwhile, the Opposition demanded a Joint Parliamentary Committee (JPC) probe into the Balco deal. The GoI rejected the demand for a JPC probe leading to a walkout by the entire Opposition in the Rajya Sabha. Shourie tried to convince the Opposition that the GoI had got a good price on the transaction, and that the deal was above board and urged them not to create hurdles in its path. Most members, however, alleged that the deal had been manipulated at some level in the government. Towards the end of the seven-hour debate, the Opposition staged a walkout after its leader Manmohan Singh (Congress I) asked Shourie to reconsider the demand for setting up a small JPC to go into the Balco deal to ensure its transparency and vindicate GoI. However, Shourie dismissed the need for a JPC probe and emphasized that an assessment by the Comptroller and Auditor General (CAG) would be sufficient. The CAG's findings could be taken up for scrutiny and discussion by Parliament, he said.

However, the Opposition remained adamant and charged the GoI of selling the Balco shares 'for a song.' The Opposition was of the view that various calculations had put the worth of the company at over Rs 2,900 crore as against the disinvestment price of Rs 551 crore agreed to by the GoI. Terming Balco's valuation as faulty, the Opposition said, Balco's captive power plant alone could fetch Rs 1050 crore and demanded that the cost detail analysis be laid in the House. They questioned the manner of evaluation undertaken by the GoI. Defending the valuation method, Shourie said, "The appropriate method for valuation of a going concern was the method of discounted cash flow.

After it was followed, the government, for abundant caution, had also asked the advisors to assess the value of the company by two other universally recognised methods. For 51% of the equity, the advisors placed the valuation through discounted cash flow method at Rs 332-507 crore; through the comparable valuation method at Rs 299-464 crore and through the balance sheet method at Rs 305-348 crore." Shourie further said, "Only the government approved valuers did the job. A screening committee of Balco selected PV Rao and Co⁸ through competitive bidding for valuing the land and buildings, and plant and machinery. The mines were valued by experts from the Indian Bureau of Mines. The value of the assets was placed around Rs 1,072 crore, 51% cent of which would be around Rs 547 crore."

On March 1 2001, voting on the controversial Balco deal took place in the Lok Sabha. The Parliament approved the controversial Balco deal, with the opposition-sponsored motion being rejected in the Lok Sabha. The motion was defeated by 239 to 119 votes. On March 2, 2001, a day after surviving the Opposition-sponsored motion in Parliament, the GoI moved swiftly to sign the shareholders agreement for the sale of 51% stake to SIL.⁹ SIL handed over a cheque for Rs 551.50 crore to the GoI for acquiring management control of Balco. On March 3, 2001, the management control of Balco was transferred to SIL.

The shareholders agreement provided for a lock-in period of three years. SIL wouldn't sell any part of its 51% stake for a period of three years after acquiring management control of the company. However, the Government was free to sell its remaining 49% stake any time, on which SIL would have the first right of refusal. The agreement also contained clauses prohibiting asset stripping by SIL within a specified time-frame. SIL also agreed not to retrench Balco's 7,000-strong workforce for a period of one year. For any retrenchment beyond a year, the workers would be offered a voluntary retirement scheme (VRS) package equivalent to one approved by the Government for PSUs.

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7] March 12, 2001.
8] Chartered Accountants registered under Income Tax Department.
9] SIL acquired 11.2 crore shares. SIL paid Rs. 49 for every share with a face value of Rs. 10.