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Journalism of Courage
Disinvestment conspiracy theories
With the government just about readying itself to go ahead with its mammoth disinvestment task, the capital8217;s full of conspiracy theories about how attempts are being made to hand these over to private players at a lower than market price. Prime Minister Vajpayee and his office which is playing a major role in pushing this process through will undoubtedly try their best to ensure this doesn8217;t happen, but now8217;s a good time to air some of these theories. It8217;ll give the government a preview of what could go wrong with the divestment process.
This is humbug. Mere televising of an event doesn8217;t make it transparent, it just makes it look transparent a magician8217;s show is as much sleight-of-hand on TV as in any other place. In any case, bids previously placed in a sealed box can be opened in the full glare of TV cameras.And contrary to the view that, say open bidding between Mr Ambani of Reliance and Mr Pathan of Indian Oil, will jack up the money they8217;ll shell out for IPCL, it may actually help reduce the price they8217;ll pay. It8217;s simple. It8217;s logical to assume that both Indian Oil and Reliance have, after their examining of IPCL8217;s assets and liabilities, fixed a maximum price they8217;ll pay for gaining control of the company. Let8217;s say, and that seems logical, that these prices are different. Assume IOC feels that IPCL is worth Rs 600 crore whileReliance who will get a complete monopoly over the petrochemicals industry in the country if it can buy IPCL values it at Rs 800 crore the argument still holds even if the figures are reversed, and IOC values IPCL more than Reliance does.
Now it is equally logical that neither Reliance nor IPCL will pay more than the ceiling they8217;ve put to IPCL8217;s value. So let8217;s say IOC is forced to bid Rs 600 crore as the auction gathers steam. What does Reliance do? It bids Rs 601 crore. Now assume IOC ups the ante. At most it8217;ll go up to Rs 700 crore though that look unlikely. Reliance then goes up to 701, and gets IPCL. Either way, it makes a huge saving. Needless to say, IOC would make that kind of killing if it has valued IPCL at more than what Reliance has. If, on the other hand, both Reliance and IOC have to give their bids in a sealed cover, each will bid the maximum they can since neither knows what the other will bid. Moral of the story: An open auction will be fishy, so beware.
Lowering Maruti8217;s price: It8217;spretty well-established by now that the government will get much less money for its 50 per cent stake in Ma-ruti today than it would have got say 2 years ago, before the entry of the various Korean companies and the Tata Indica. It8217;s also pretty clear that the price it8217;d have got last year, before a Supreme Court judgment banning sales of Maruti cars in the national capital region showed that Maruti was lagging behind in terms of auto technology. Conspiracy theorists suggest this is being done deliberately to allow Maruti to be sold on the cheap. It8217;s pretty clear, for example, that Maruti8217;s profits will decline steeply this year due to the sharp reduction in prices earlier to meet the competition. And with the rapid inroads being made by the newcomers, it8217;s market share will continue to decline in the mid-car segment, for example, since the current capacity is around double the demand projection for the next few years, it8217;s obvious several players including Maruti will bleed badly. Internal reserves willalso fall with about Rs 5,000 crore to be invested in new models.
Since these are the parameters which constitute a company8217;s value, obviously each day of delay lowers the effective price Suzuki or General Motors will have to pay for gaining control of Maruti. Given that the government has made a mistake, deliberately or otherwise, how can this be corrected? How can the best value be still got for Maruti? Through a bit of financial re-engineering. Let both Suzuki and the government agree to hike Maruti8217;s capital base by a sixth, say Rs 20 crore. Now, let them both renounce their stake, and offer it to the market going by current estimates, these shares whose book value is Rs 20 crore should fetch Maruti somewhere in the region of Rs 1,000 to 1,400 crore.
Immediately, with its reserves up, the valuation of the company shoots up. And by making such a small initial public offering, the government also begins a process of book-building8217;, which is essentially trying to get the best price for its shares byinviting various bids from individual investors. Based on this book price, it then negotiates with Suzuki or General Motors for a decisive block. It8217;s only with this sort of strategy that the government can get a better price for Maruti, by say next year, and undo a large part of the damage done so far.
So, watch out for these parameters when the government really kicks off its decisive disinvestment push. It8217;ll give you some idea as to whether the government8217;s motives are honourable or not.
