Balco - The Disinvestment Story

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Themes: Corporate Restructuring
Period : 2001
Organization : BALCO
Pub Date : 2002
Countries : India
Industry : Metals & Mining

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Case Code : BECG004
Case Length : 10 Pages
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Balco - A Profile Contd...

TABLE I
PRODUCTION FACILITIES

Korba Plant	Bidhanbag Plant
200,000 tonnes per annum capacity Alumina plant.	Hot and Cold Rolling Mills (3600 tonnes capacity).
100,000 tonnes per annum capacity Smelter.	One Extrusion Press (1250 tonnes capacity).
Three wire rod rolling mills for manufacture of Aluminium redraw wire rods.	Foil Plant (600 tonnes capacity).
Three Extrusion Presses (3150 tonnes, 2500 tonnes and 800 tonnes capacity).	Conductor Plant.
Hot and Cold Rolling Mills (40,000 tonnes capacity).
274 MW power plant.

Stage I: The Tug of War

In mid 2000, leading domestic players like the Aditya Birla group company-Hindalco Ltd, SIL and the global major, Alcoa, expressed their interest to acquire 51% controlling stake in Balco. They had to verify the financial and operating performances of Balco before putting in a financial bid for purchasing the 51% equity on offer.

Once the financial bids were received, majority stake in the company would pass on to the highest bidder. An inter-ministerial group (IMG)¹ was constituted to oversee the disinvestment process. In late 2000, the group visited the Balco plant (Korba) to get a first-hand impression of the plant and its facilities, its operation and the mood of the employees prior to disinvestment.

The Balco disinvestment was mired in controversy right from the day it was announced. The employees' union of Balco put up a stiff resistance to the disinvestment process. The union alleged that the MoM was adopting coercive means to complete the process.

In a memorandum to the Prime Minister, A.B. Vajpayee, the union alleged that the MoM was 'behaving like a guilty conscious culprit' and resorted to enforcing Section 144 in and around the Balco plant even before the Committee of IMG arrived. "Although the situation did not warrant it, the Government of Madhya Pradesh² had deputed thousands of policemen in plain clothes and uniform to terrorize the employees and facilitate the IMG Committee members' visit to the plant to achieve their motive. Today, the workers of the PSU are more worried about their survival and protection of their service conditions subsequent to the disinvestment," the union said.

The union cited that Balco was a profit-making company and had a huge capital base of about Rs. 500 crores. It was the only public sector enterprise that had paid its 50% equity, i.e., Rs. 244 crores to the exchequer. The government should not jeopardise the future of the workers by disinvesting it. Government officials, however, pointed out that in the late 1990s, only 50% of Balco's profits had been on account of operating margins while the other half was due to interest earned on fixed deposits.

The GoI further said that Balco was under threat as the company was running on outdated technology and was making profits only because aluminium prices in international market were ruling high. A downturn in prices would again take the company to the state of sickness from which it had recovered in 1988-89. The GoI stand was that it was better to sell the company when it was earning profits to get a good deal.

The GoI said that the cash reserve of Rs 437 crore accumulated by Balco by giving less dividend to the government was too little for the modernization of the company. According to government estimates, a total of Rs 4,000 crore would be required for the modernization and expansion of the company and it could be infused only by bringing in a strategic partner.

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1] The IMG comprised of Secretary (Mines), as the chairman, together with Secretary (Disinvestment), and representatives from the Departments of Legal Affairs, Company Affairs, Public Enterprises and Economic Affairs.
2] The Korba plant was located in Madhya Pradesh, which later became a part of the newly constituted Chattisgarh state.