Balco - The Disinvestment Story
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Details
Themes: Corporate Restructuring
Period : 2001
Organization : BALCO
Pub Date : 2002
Teaching Note : Available
Countries : India
Industry : Metals & Mining
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Case Code : BECG004
Case Length : 10 Pages
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Stage I: The Tug of War Contd...
In late 2000, to win the confidence of the agitating employees, the GoI for the first time announced its decision to offer stock options to the employees of Balco. It also stated that there would be no retrenchment of labour in Balco for at least one year after the disinvestments. In case of any decision to reduce the manpower, it would have to offer a package not less attractive than the government approved VRS package.
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Meanwhile, opposition to the disinvestment was growing, with the union submitting a memorandum to the Prime Minister seeking his intervention. The employees alleged that proper evaluation of the company had not been done. They noted the cost of the Korba aluminium plant and Bidhanbag plant, land, quarters and buildings (Rs 800 crore) and new cold-rolling projects (Rs 184 crores), has been grossly underestimated. |
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The union in its petition to DCA said that several factors such as fixation of reserve price before the start of the disinvestment process, valuation of the company by GoI and non-settlement of pending dues by many of foreign and domestic parties have not been taken care of. "The process (disinvestment) is likely to be completed without valuation of assets of Balco on fair market value as recommended by the disinvestment commission," the union said.
In February 2001, the GoI approved the sale of 51% stake in Balco to SIL for Rs 551.5 crore. The Cabinet Committee on Disinvestment, at its meeting, endorsed the sale of Government equity in Balco along with the transfer of management control to the highest strategic bidder. SIL emerged the winner beating the A.V. Birla group's Hindalco and the US-based Alcoa.3 Said Arun Shourie (Shourie), Disinvestment Minister, "The bid of Sterlite compares well with the expectation that the Government had formed with the reserve price." However, he did not disclose what the reserve price was except that it was less than the price quoted by SIL.4 "Apart from the highest price, the business plan of Sterlite was the most credible," Shourie added.
Dispelling fears on the employees' future post-disinvestment, Shourie said that in the first year after the takeover, there would not be any retrenchment at all. After the first year, if any retrenchment took place, the VRS package offered would be as generous as the VRS package prevalent in PSUs. "The trade union leaders have expressed great satisfaction in this clause," Shourie added. He reiterated that the entire process was concluded in a completely transparent manner after exercising due diligence at every step.
Stage II: The Controversy Deepens
The deal between the GoI and SIL had attracted considerable flak mainly from the Opposition. There was a niggling doubt over the deal, which seemed to be a reflection of the lack of transparency. The GoI said that the bids were valued by four different methods.5 However, the value arrived at by these bids was not disclosed. Again, the reserve price was not disclosed nor the value of the bids by Hindalco and Alcoa and whether they were higher or lower than the reserve price.
3] Hindalco's bid was for Rs. 265 crores. Alcoa had opted out of the race.
4] On March 2, 2001, in an interview to The Economic Times, Anil Agarwal, Chairman, Sterlite Group, disclosed that the GoI's reserve price was Rs. 514 crore.
5] Discounted cash flow method, Comparable valuation method, Balance sheet valuation method and Asset valuation method.