06-01-2005, 10:51 PM
The Centre and the Centaur, Part-I
While the government deliberates
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->The CAG report on the privatisation of the two Centaur hotels in Mumbai has led to an inquiry. In the politically-inspired cacophony, it is not being understood how hard the government worked to ensure there was a bidder, that his guarantees were examined, that he was held to his bid and every paisa paid to the government
Â
Arun Shourie
Â
ââBut the original valuation of the hotel was Rs. 246 crore, the Government says. How was this brought down to a reserve price of Rs 101 crore?ââ The correspondents at the press conference were minatory.
I do not know where this figure of Rs 246 crore has come from, I said. On what basis have the calculations for this been made? I asked. Who has made them? Were they made in the mid-1990s when the hotel was earning a profit of Rs 27 crore a year or when it was incurring a loss - as it was in the years preceding disinvestment. The reporters did not know either the basis for that figure or who had calculated it, or when. Yet the insistence, a sort of ââexplain or elseââ. There is no mention of the Rs 246 crore valuation in the CAG report.
ââBut was it right that Kerkar was on the Board of Air India one day and the very next day he became a bidder for the hotel?ââ another questioner demanded with the same insistence and belligerence. Again, there is no mention of this in the CAGâs report. As the reporters had been so aggressive, I sought the facts from a colleague who had worked on the transaction. The records showed that Kerkar had been on the Board of Air India till 10 December 1998. The bids were called in October/November 2001! When was the valuation done? I inquired. Sometime in 2001, the person told me. But the way the matter had been projected was that Kerkar had been on the Board of Air India one day and the next day he had become a bidder for a property of its subsidiary! Just a few days had to pass, and the matter was lifted even higher. Kerkar was said to have been a member not just of the Board of Air India till the very eve of bidding, he was said to have been a member of the Disinvestment Commission itself!
In any event, the insinuation completely disregarded the fact that the procedures we had set up ensured that no bidder would have any difficulty in learning what any other bidder knew. In each instance, a ââdata roomââ was prepared. It contained every conceivable bit of information about the enterprise. Each bidder was invited to inspect every detail. Teams of accountants, lawyers, finance people from the bidders would spend long hours going through every scrap. And if they wanted further information on any particular, that was collected and furnished.
One bidder
ââBut what about there having been only one bidder? The CAG says that as there was only one bidder the advantages of competition did not accrue.ââ We should be thankful that there was at least one bidder. In the case of eleven enterprises, after we had slogged for one and a half to two years on each to them, we had to return them to the Ministry of Heavy Industries and Public Enterprises - because not even one bidder was willing to take them over. (Incidentally, each of those companies continues to languish, each remains a drain on the Exchequer.) The question had then been put to the Cabinet Committee on Disinvestment as a policy issue: what should be done if only one bidder is left? The Cabinet Committee decided, and the decision was announced, that, even if there is only one bidder left, the process should be completed. The CAG report itself records that, in the case of the Juhu hotel, twenty had expressed an interest and entered the process.
That by the end only was one was left was typical. In case after case, as the bidders learnt more about the enterprise, more and more of them concluded that they would only be taking on headaches were they to win the competition. In several cases they were given a vivid pre-view of what to expect. When the Advisors and potential bidders reached the Janpath Hotel in Delhi, they were mobbed. In the Kovalam Hotel in Kerala, they were chased, and barely escaped. Even the Secretary of the Disinvestment Department, had to have heavy police guard when he visited BALCO.
Nor are the hotels the only cases in which Government had to deal with the situation of there being just one bidder. Paradeep Phosphates, Modern Foods, Jessops â in such enterprises too there was only one bidder left. Had the Government abandoned the process, the enterprises would still be hemorrhaging, as they had been for years. In the short time since they were disinvested, the enterprises have completely turned around â wages have increased up to 30 per cent; production has increased up to 250 per cent; instead of bleeding the exchequer, they are earning profits and will contribute to governmental revenues. Nor is the NDA Government at the Centre, the only one which completed the process even though in such cases there was only one bidder. In each of the three circles of the Delhi Vidyut Board which were put up for disinvestment by the Congress-I Government in Delhi, there was only one bidder. Not only did the Congress-I Government complete the disinvestment in favour of the single bidder
⢠After rejecting the bids, it entered into negotiations with that single bidder â Reliance in two circles, and the TATAs in the third.
⢠It then gave huge â that is the correct word â to the single bidders.
⢠Each of the bidders maintained that the concessions were not sufficient. The Congress-I Government then increased the concessions very substantially again.
These new terms were not communicated to the bidders who had been in the race earlier and had dropped out. They were communicated only to those two single bidders. You wouldnât have heard the CAG or the Congress-I, nor, of course, the Marxists on any of this!
Written record
ââBut there is no written record of why the bidders withdrew from the process in the Centaur disinvestment, the CAG report charges.ââ Did the Congress-I Government of Delhi get the bidders who withdrew from the race for the privatization of the Delhi Vidyut Board to record their reasons in writing? Or take the case that is currently in progress. The CPI(M) Government in West Bengal is disinvesting the Great Eastern Hotel of Kolkata - one of the symbols of the condition of these enterprises. The Indian Express of 27 May, 2005 reported that one of the principal potential bidders, Kenilworth, has withdrawn. ââKenilworth has not offered any reason for the last minute decision to opt out,ââ the Managing Director of the Hotel told the Express. Should the CPI(M) Government be hauled up? What difference would a written statement make? The bidder would record some generality, ââUpon inspection of information in the data room, we found that the enterprise would not have synergy with the operations of our group.ââ Actually, asking the potential bidders to furnish such statements will make a difference. For the worse. Bidders, who are hesitant to enter the fray in any case, would now have one more apprehension: if, upon finding out the real condition of the enterprise, they decide to opt out, they will have to give statements in writing, or what they say will be reduced to writing in Government files, and that could become the subject of interrogation by the CBI, CVC, PAC.
Take the cases that I recalled earlier, of the staff cornering and chasing the bidders. Were the bidder to record in writing, ââHaving got a glimpse of what kind of employees we would have to contend with, I realised that we would be taking on trouble, that this kind of work-culture would eventually infect our other enterprises also, and, therefore, I am withdrawing from the process.ââ Or if, after inspecting the premises of Ashoka Hotel, he were to record, ââAs we could not get any assurance from Government that the 300 illegal quarters that have been built on the premises, would be demolished.ââ Or if, after inspecting the ITDC property in Mahabalipuram, he were to record, ââAs upon visiting the site we discovered that a cremation ground and two burial grounds have been set up right in the premises.ââ Were he to record any of this in writing, would there not be the charge that he had written all this only to depress the value of the property so as to enable another bidder, who was in fact in league with him, to purchase it at the lower price? And would that not result in a CBI inquiry into his affairs? Some way to maximize competition!
Scrutiny
ââBut it isnât just that only one bidder was left. The CAG says that adequate scrutiny was not done about his financial strength.ââ Government is not into doing academic studies of bidders. For Government the one thing that mattered was that, whoever the bidder is, pays up the amount he has bid. And this transaction â exactly like every other disinvestment transaction completed by the NDA Government â shows that the procedures and criteria that had been adopted ensured that the bidder paid every paisa of the bid. It just so happens that in this particular case, eight commercial banks had assessed this bidderâs financial strength. They had independently assessed his proposal of investing in the hotel. They had concluded that the bidder was creditworthy, and that the transaction was a viable one. Early on in the disinvestment process, the Cabinet Committee on Disinvestment approved a list of grounds on which bidders and advisors were to be disqualified. In several well-known cases commercial rivals brought enormous pressure to bear demanding that this or that bidder be disqualified. The Ministry and the Cabinet Committee on Disinvestment always went strictly by those grounds.If the party fell afoul of those criteria, there was no one who could get the person included. If the party did not fall afoul of the criteria, there was no one who could get it excluded. Had the question of disqualification of Tulip come up, it would have been adjudged exactly on the same criteria. Had we gone by subjective assessments of ââfinancial strengthââ and the like, and excluded parties, we would have been charged - that we were deliberately disqualifying potential bidders to steer the transaction to some pre-selected bidder!
ââBut one of the banks says that he has defaulted in repaying the amounts due to it.ââ As on the ââRs. 246 crore valuation,ââ as on Kerkar having been on the Board one day and become a bidder the next, the facts are not clear at all. When I have inquired which is the bank that says so, different answers have been forthcoming - the most frequent one being, ââBut everyone is saying so.ââ Assume that to be the case, assume that Tulip has defaulted to a bank. At the initiative of the NDA Government, Parliament passed a law that gives full powers to the bank as well as the Government to seize the assets of the defaulter as well as visit other punishments on the defaulter. Why are the bank and the Government not using those powers? Should one conclude that they are going out of their way to be lenient to this man for collateral reasons? And demand that there should be a CBI inquiry into their failure to use the powers that they have under the law?
ââBut the CAG says that you gave him extensions, and then didnât charge him interest for late payment.ââ
Anyone with the slightest knowledge of economic and business matters knows that mergers and acquisitions take months and years. Getting the man to pay up on March 11, 2002 instead of 31 December, 2001 is to be seen in this context - to say nothing of the time-overruns that are characteristic of government operations in general. And one must understand the purpose for which deadlines and bank guarantees were instituted by us. We had the sorry experience of the telecom sector before us, and not just in India. That experience was to be repeated later in the bidding for FM Radio stations. Bidders would bid very high, and then escape - they wouldnât pay. This happened in Indiaâs case when the telecom sector was opened up. It happened in the 3G licence bids in Europe too. In the few cases in which bidders actually paid up the exorbitant bids they had filed, they went bankrupt - and thereby hurt not just themselves but the sectors also. For this reason, we specified a deadline within which the winner must pay, and also the amount he would forfeit if he did not pay up. That is why each bid had to be accompanied by a guarantee from a bank which we could encash in the event of the bidder winning the bid and then not paying up. The purpose of these rquirements was not to prove our ââpowerââ, not to prove that we were ââtoughââ. The purpose was to get the money out of the bidder that he had promised to pay. In the case of this hotel, Tulip had filed a bid that was 53 per cent higher than the reserve price - Rs. 153 crore instead of Rs. 101 crore 60 lakhs. The reserve price used to be a carefully guarded secret. That is one reason why we were able to get prices much higher than it in case after case. Once the bid was accepted by the Cabinet Committee on Disinvestment, we would announce the reserve price as well as the bids that had been filed by different bidders. In this case too, the same procedure was followed. After the Cabinet meeting, I would have but announced the reserve price, and this bidder would have realised that he had filed what from his point of view, and that of institutions from whom he may have wanted to raise residual money, was an excessive bid.
Our objective from then on - as in every such case when the party had filed a bid much higher than the reserve price - was to ensure that he did not get out of his obligation to pay the full amount.
Hence, when he asked for a few days more in which to arrange some residual amount, that extension was granted. But on one condition. The original amount that he would have had to forfeit had he not paid was Rs. five crore. When he requested a few extra days, this amount was raised to 10 per cent of his bid â to Rs 15.3 crore. He seemed to be trying to hem and haw again. I directed that the bank guarantee be encashed. That was on 1 February, 2002. Within two or three days, he deposited a bankerâs cheque of Rs 10 crore. As the day for payment approached, Tulip asked for a further extension on the ground that meetings of all the Boards of the concerned banks had not taken place, and the banks needed a few more days to sanction the loans. Kerkar requested another extension - with the offer that he would file an additional bank guarantee so that, if he did not pay up by the agreed date, he would forfeit, not Rs 153 crore, but Rs 36 crore. My colleague, JK Chattopadhyaya, Under Secretary, examined the guarantee Kerkar had furnished. He found infirmities in it. Kerkar was, therefore, informed that the guarantee was not acceptable. To put pressure on him, on 21 February, 2002, I directed a second time that the guarantee - this time of Rs 15.3 crore be encashed.
Kerkar and his team rushed to report that the banks had agreed to loan the amounts that Tulip needed.
We held him to the bid he had filed, and Government got every paisa. It was precisely the pressure that was put on him â by twice directing that his guarantee be encashed â that ensured that he could not wriggle out of what was a bid 53 per cent higher than the reserve price.
ââBut the CAG says that you facilitated the financing of the purchase of the hotel by this bidder by holding a meeting of the banks.ââ
While on other, I merely differ with what the CAGâs report says, this is the one point on which I feel the report falls short of what is worthy of high constitutional office. And I will explain why
 <!--QuoteEnd--><!--QuoteEEnd-->
While the government deliberates
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->The CAG report on the privatisation of the two Centaur hotels in Mumbai has led to an inquiry. In the politically-inspired cacophony, it is not being understood how hard the government worked to ensure there was a bidder, that his guarantees were examined, that he was held to his bid and every paisa paid to the government
Â
Arun Shourie
Â
ââBut the original valuation of the hotel was Rs. 246 crore, the Government says. How was this brought down to a reserve price of Rs 101 crore?ââ The correspondents at the press conference were minatory.
I do not know where this figure of Rs 246 crore has come from, I said. On what basis have the calculations for this been made? I asked. Who has made them? Were they made in the mid-1990s when the hotel was earning a profit of Rs 27 crore a year or when it was incurring a loss - as it was in the years preceding disinvestment. The reporters did not know either the basis for that figure or who had calculated it, or when. Yet the insistence, a sort of ââexplain or elseââ. There is no mention of the Rs 246 crore valuation in the CAG report.
ââBut was it right that Kerkar was on the Board of Air India one day and the very next day he became a bidder for the hotel?ââ another questioner demanded with the same insistence and belligerence. Again, there is no mention of this in the CAGâs report. As the reporters had been so aggressive, I sought the facts from a colleague who had worked on the transaction. The records showed that Kerkar had been on the Board of Air India till 10 December 1998. The bids were called in October/November 2001! When was the valuation done? I inquired. Sometime in 2001, the person told me. But the way the matter had been projected was that Kerkar had been on the Board of Air India one day and the next day he had become a bidder for a property of its subsidiary! Just a few days had to pass, and the matter was lifted even higher. Kerkar was said to have been a member not just of the Board of Air India till the very eve of bidding, he was said to have been a member of the Disinvestment Commission itself!
In any event, the insinuation completely disregarded the fact that the procedures we had set up ensured that no bidder would have any difficulty in learning what any other bidder knew. In each instance, a ââdata roomââ was prepared. It contained every conceivable bit of information about the enterprise. Each bidder was invited to inspect every detail. Teams of accountants, lawyers, finance people from the bidders would spend long hours going through every scrap. And if they wanted further information on any particular, that was collected and furnished.
One bidder
ââBut what about there having been only one bidder? The CAG says that as there was only one bidder the advantages of competition did not accrue.ââ We should be thankful that there was at least one bidder. In the case of eleven enterprises, after we had slogged for one and a half to two years on each to them, we had to return them to the Ministry of Heavy Industries and Public Enterprises - because not even one bidder was willing to take them over. (Incidentally, each of those companies continues to languish, each remains a drain on the Exchequer.) The question had then been put to the Cabinet Committee on Disinvestment as a policy issue: what should be done if only one bidder is left? The Cabinet Committee decided, and the decision was announced, that, even if there is only one bidder left, the process should be completed. The CAG report itself records that, in the case of the Juhu hotel, twenty had expressed an interest and entered the process.
That by the end only was one was left was typical. In case after case, as the bidders learnt more about the enterprise, more and more of them concluded that they would only be taking on headaches were they to win the competition. In several cases they were given a vivid pre-view of what to expect. When the Advisors and potential bidders reached the Janpath Hotel in Delhi, they were mobbed. In the Kovalam Hotel in Kerala, they were chased, and barely escaped. Even the Secretary of the Disinvestment Department, had to have heavy police guard when he visited BALCO.
Nor are the hotels the only cases in which Government had to deal with the situation of there being just one bidder. Paradeep Phosphates, Modern Foods, Jessops â in such enterprises too there was only one bidder left. Had the Government abandoned the process, the enterprises would still be hemorrhaging, as they had been for years. In the short time since they were disinvested, the enterprises have completely turned around â wages have increased up to 30 per cent; production has increased up to 250 per cent; instead of bleeding the exchequer, they are earning profits and will contribute to governmental revenues. Nor is the NDA Government at the Centre, the only one which completed the process even though in such cases there was only one bidder. In each of the three circles of the Delhi Vidyut Board which were put up for disinvestment by the Congress-I Government in Delhi, there was only one bidder. Not only did the Congress-I Government complete the disinvestment in favour of the single bidder
⢠After rejecting the bids, it entered into negotiations with that single bidder â Reliance in two circles, and the TATAs in the third.
⢠It then gave huge â that is the correct word â to the single bidders.
⢠Each of the bidders maintained that the concessions were not sufficient. The Congress-I Government then increased the concessions very substantially again.
These new terms were not communicated to the bidders who had been in the race earlier and had dropped out. They were communicated only to those two single bidders. You wouldnât have heard the CAG or the Congress-I, nor, of course, the Marxists on any of this!
Written record
ââBut there is no written record of why the bidders withdrew from the process in the Centaur disinvestment, the CAG report charges.ââ Did the Congress-I Government of Delhi get the bidders who withdrew from the race for the privatization of the Delhi Vidyut Board to record their reasons in writing? Or take the case that is currently in progress. The CPI(M) Government in West Bengal is disinvesting the Great Eastern Hotel of Kolkata - one of the symbols of the condition of these enterprises. The Indian Express of 27 May, 2005 reported that one of the principal potential bidders, Kenilworth, has withdrawn. ââKenilworth has not offered any reason for the last minute decision to opt out,ââ the Managing Director of the Hotel told the Express. Should the CPI(M) Government be hauled up? What difference would a written statement make? The bidder would record some generality, ââUpon inspection of information in the data room, we found that the enterprise would not have synergy with the operations of our group.ââ Actually, asking the potential bidders to furnish such statements will make a difference. For the worse. Bidders, who are hesitant to enter the fray in any case, would now have one more apprehension: if, upon finding out the real condition of the enterprise, they decide to opt out, they will have to give statements in writing, or what they say will be reduced to writing in Government files, and that could become the subject of interrogation by the CBI, CVC, PAC.
Take the cases that I recalled earlier, of the staff cornering and chasing the bidders. Were the bidder to record in writing, ââHaving got a glimpse of what kind of employees we would have to contend with, I realised that we would be taking on trouble, that this kind of work-culture would eventually infect our other enterprises also, and, therefore, I am withdrawing from the process.ââ Or if, after inspecting the premises of Ashoka Hotel, he were to record, ââAs we could not get any assurance from Government that the 300 illegal quarters that have been built on the premises, would be demolished.ââ Or if, after inspecting the ITDC property in Mahabalipuram, he were to record, ââAs upon visiting the site we discovered that a cremation ground and two burial grounds have been set up right in the premises.ââ Were he to record any of this in writing, would there not be the charge that he had written all this only to depress the value of the property so as to enable another bidder, who was in fact in league with him, to purchase it at the lower price? And would that not result in a CBI inquiry into his affairs? Some way to maximize competition!
Scrutiny
ââBut it isnât just that only one bidder was left. The CAG says that adequate scrutiny was not done about his financial strength.ââ Government is not into doing academic studies of bidders. For Government the one thing that mattered was that, whoever the bidder is, pays up the amount he has bid. And this transaction â exactly like every other disinvestment transaction completed by the NDA Government â shows that the procedures and criteria that had been adopted ensured that the bidder paid every paisa of the bid. It just so happens that in this particular case, eight commercial banks had assessed this bidderâs financial strength. They had independently assessed his proposal of investing in the hotel. They had concluded that the bidder was creditworthy, and that the transaction was a viable one. Early on in the disinvestment process, the Cabinet Committee on Disinvestment approved a list of grounds on which bidders and advisors were to be disqualified. In several well-known cases commercial rivals brought enormous pressure to bear demanding that this or that bidder be disqualified. The Ministry and the Cabinet Committee on Disinvestment always went strictly by those grounds.If the party fell afoul of those criteria, there was no one who could get the person included. If the party did not fall afoul of the criteria, there was no one who could get it excluded. Had the question of disqualification of Tulip come up, it would have been adjudged exactly on the same criteria. Had we gone by subjective assessments of ââfinancial strengthââ and the like, and excluded parties, we would have been charged - that we were deliberately disqualifying potential bidders to steer the transaction to some pre-selected bidder!
ââBut one of the banks says that he has defaulted in repaying the amounts due to it.ââ As on the ââRs. 246 crore valuation,ââ as on Kerkar having been on the Board one day and become a bidder the next, the facts are not clear at all. When I have inquired which is the bank that says so, different answers have been forthcoming - the most frequent one being, ââBut everyone is saying so.ââ Assume that to be the case, assume that Tulip has defaulted to a bank. At the initiative of the NDA Government, Parliament passed a law that gives full powers to the bank as well as the Government to seize the assets of the defaulter as well as visit other punishments on the defaulter. Why are the bank and the Government not using those powers? Should one conclude that they are going out of their way to be lenient to this man for collateral reasons? And demand that there should be a CBI inquiry into their failure to use the powers that they have under the law?
ââBut the CAG says that you gave him extensions, and then didnât charge him interest for late payment.ââ
Anyone with the slightest knowledge of economic and business matters knows that mergers and acquisitions take months and years. Getting the man to pay up on March 11, 2002 instead of 31 December, 2001 is to be seen in this context - to say nothing of the time-overruns that are characteristic of government operations in general. And one must understand the purpose for which deadlines and bank guarantees were instituted by us. We had the sorry experience of the telecom sector before us, and not just in India. That experience was to be repeated later in the bidding for FM Radio stations. Bidders would bid very high, and then escape - they wouldnât pay. This happened in Indiaâs case when the telecom sector was opened up. It happened in the 3G licence bids in Europe too. In the few cases in which bidders actually paid up the exorbitant bids they had filed, they went bankrupt - and thereby hurt not just themselves but the sectors also. For this reason, we specified a deadline within which the winner must pay, and also the amount he would forfeit if he did not pay up. That is why each bid had to be accompanied by a guarantee from a bank which we could encash in the event of the bidder winning the bid and then not paying up. The purpose of these rquirements was not to prove our ââpowerââ, not to prove that we were ââtoughââ. The purpose was to get the money out of the bidder that he had promised to pay. In the case of this hotel, Tulip had filed a bid that was 53 per cent higher than the reserve price - Rs. 153 crore instead of Rs. 101 crore 60 lakhs. The reserve price used to be a carefully guarded secret. That is one reason why we were able to get prices much higher than it in case after case. Once the bid was accepted by the Cabinet Committee on Disinvestment, we would announce the reserve price as well as the bids that had been filed by different bidders. In this case too, the same procedure was followed. After the Cabinet meeting, I would have but announced the reserve price, and this bidder would have realised that he had filed what from his point of view, and that of institutions from whom he may have wanted to raise residual money, was an excessive bid.
Our objective from then on - as in every such case when the party had filed a bid much higher than the reserve price - was to ensure that he did not get out of his obligation to pay the full amount.
Hence, when he asked for a few days more in which to arrange some residual amount, that extension was granted. But on one condition. The original amount that he would have had to forfeit had he not paid was Rs. five crore. When he requested a few extra days, this amount was raised to 10 per cent of his bid â to Rs 15.3 crore. He seemed to be trying to hem and haw again. I directed that the bank guarantee be encashed. That was on 1 February, 2002. Within two or three days, he deposited a bankerâs cheque of Rs 10 crore. As the day for payment approached, Tulip asked for a further extension on the ground that meetings of all the Boards of the concerned banks had not taken place, and the banks needed a few more days to sanction the loans. Kerkar requested another extension - with the offer that he would file an additional bank guarantee so that, if he did not pay up by the agreed date, he would forfeit, not Rs 153 crore, but Rs 36 crore. My colleague, JK Chattopadhyaya, Under Secretary, examined the guarantee Kerkar had furnished. He found infirmities in it. Kerkar was, therefore, informed that the guarantee was not acceptable. To put pressure on him, on 21 February, 2002, I directed a second time that the guarantee - this time of Rs 15.3 crore be encashed.
Kerkar and his team rushed to report that the banks had agreed to loan the amounts that Tulip needed.
We held him to the bid he had filed, and Government got every paisa. It was precisely the pressure that was put on him â by twice directing that his guarantee be encashed â that ensured that he could not wriggle out of what was a bid 53 per cent higher than the reserve price.
ââBut the CAG says that you facilitated the financing of the purchase of the hotel by this bidder by holding a meeting of the banks.ââ
While on other, I merely differ with what the CAGâs report says, this is the one point on which I feel the report falls short of what is worthy of high constitutional office. And I will explain why
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