Why is our high-profile Union Minister for Communications and Information Technology Pramod Mahajan hopping mad at the Tata group?
Telecommunications Minister Pramod Mahajan Has one of India's best-known corporate groups indulged in "asset stripping" and made a "mockery" of the divestment process? Or is the minister, considered to be Prime Minister Atal Bihari Vajpayee's right-hand man, peeved for all the wrong reasons?
Has Mahajan been unduly influenced by powerful lobbies cutting across the public and private sectors in claiming that the Tata group committed "breach of trust" reposed in the group and should reverse its decision?
The controversy started after the board of directors of Videsh Sanchar Nigam Limited met on Tuesday May 28 and decided to invest a huge sum up to Rs 1,200 crore (Rs 12 billion) to purchase up to 26 per cent of the "estimated final" equity capital of Tata Teleservices Limited over the next four years.
It may be recalled that, on February 5, the government of India had accepted the bid of Panatone Fininvest, a Tata group company, to acquire 25 per cent of the equity capital of the then public sector VSNL for a sum of Rs 1,439 crore (Rs 14.39 billion). The only other bidder for a quarter of VSNL's equity was the Reliance group - its bid was lower than the bid of the Tatas by a good Rs 92 crore (Rs 920 million).
Subsequently, the Tata group shelled out an additional Rs 1,131 crore (Rs 11.31 billion) by acquiring another 20 per cent shares of VSNL through a statutory public offer: the total outgo of the group thus worked out to Rs 2,570 crore (Rs 25.70 billion).
Let us consider the arguments and counter-arguments that have been forwarded. Minister Mahajan, who went public with his criticism on Friday May 31 (till then he had been talking to journalists off the record), first claimed that the issue was not one of "asset stripping" or "cash stripping" but the "attitude" of Bombay House - the headquarters of the Tata group.
He wondered whether the group that was proud of its adherence to corporate ethics, had acted in an ethical manner by taking out a sum of Rs 1,200 crore (Rs 12 billion) from VSNL within a month of investing Rs 1,500 crore (Rs 15 billion) in the company.
The minister categorically said he thought there was a "game" behind the move to get VSNL to invest Rs 1,200 crore in TTSL.
"We expected (the) Tatas to strengthen VSNL but instead Tata Teleservices is being strengthened which does not have money," Mahajan said.
He also pooh-poohed the argument earlier forwarded by the Tata group that VSNL did not have a customer base and that its investment in TTSL would give it a strategic advantage in the internet telephony business. He said the Tatas had a meagre customer base in Andhra Pradesh.
Currently, TTSL is operating basic telephony services only in Andhra Pradesh where it has a customer base of over 150,000 subscribers.
The Tata group, however, intends setting up facilities to provide basic telephony services to various parts of the country. These include Delhi and Maharashtra including Mumbai, where it would compete directly with the public sector Mahanagar Telephone Nigam Limited, as well as Gujarat, Tamil Nadu and Karnataka, where the Tata group would compete directly with Bharat Sanchar Nigam Limited, the corporatised avatar of what used to be the Department of Telecommunications.
That's not all. The Tata group has also expressed its intention to acquire BSO (basic service operator's) licences for other telecommunications "circles" (or areas) like Kerala, Punjab and Haryana.
To return to Mahajan's arguments, the powerful Union Minister held out a veiled threat to the Tata group. He said: "I am requesting them to reverse the decision. My secretary will write to them. At least the government nominee should have been part of (a) board sub-committee which considers investment proposals… If this is not done, the government will do whatever is legally possible and permissible…After all, government is government."
(Incidentally, the Union government continues to be the second largest shareholder of VSNL after the Tata group holding 26 per cent of its equity capital.)
Even before Mahajan's tough talk, the largest telecommunications player in the country under government ownership, namely, BSNL had reminded VSNL that the latter owed the former a sum of around Rs 600 crore (Rs 6 billion) as dues since April 1.
This amount is owed by VSNL to BSNL for carrying the domestic part of international telephone calls which are routed through VSNL's gateways. A Cabinet minister was quoted by the Hindustan Times newspaper as saying that if the Tatas had the legal right to invest VSNL's money in a group company, the government too reserved the right to route long distance telephone traffic (generated by MTNL and BSNL) through alternate carriers (other than VSNL). No prizes for guessing the identity of the minister.
It had also been earlier reported that the government might move the Company Law Board claiming "oppression" of minority shareholders' rights.
However, as is typical of most bureaucracies including the Indian government, the left hand often did not know what the right hand was doing.
Even as Mahajan was fretting and fuming, the ministry headed by his Cabinet colleague and Minister for Divestment, Arun Shourie, let it be known to all and sundry that, in its considered opinion, the Tata group had not violated the shareholders' agreement it had signed at the time of divestment.
It was further stated by unnamed officials in the divestment ministry that the shareholders' agreement did not call for prior government approval for investments by VSNL - presumably, including investments in a Tata group company - provided such investments are made in "good faith."
The Tata group maintains that the proposed VSNL investment in TTSL was the best option for the company to build a customer base.
Privatised public sector undertakings should be allowed to operate as board-driven commercial bodies, the argument runs. It was also pointed out by VSNL Managing Director S K Gupta (who was earlier chairman and managing director when VSNL was government controlled) that more than a year ago, the DoT had not allowed VSNL and MTNL to acquire basic telephony licences in Category A circles - which are the potentially more lucrative areas - on the ground that this would lead to duplication of the government's efforts.
More importantly, VSNL claims that its business interests are not in conflict with those of TTSL whereas these do indeed conflict with the interests of other private players - notably, the Bharti and Reliance groups - since TTSL does not have a licence for either national long distance telephony or for international long distance telephony.
Particularly significant is the fact that unlike VSNL, BSNL, MTNL and the Reliance and Bharti groups have direct access to customers and already possess or are in the process of acquiring licences for NLD and ILD telephony.
At the same time, what Mahajan cannot deny is that his predecessors systematically sought to "weaken" VSNL before the government relinquished managerial control over this company that used to monopolise ILD telephony until recently.
It may be recalled that in March 1999, at a time when VSNL had sold its shares in foreign markets, the government had categorically stated in the company's offer document that VSNL would continue to have a monopoly on ILD telephone till the end of March 2004.
Subsequently, during the following year 2000, this deadline was "unilaterally" and "arbitrarily" brought forward by two years to the end of March 2002, resulting in a crash in the market value of VSNL shares.
At this juncture, as part of a so-called compensation package, VSNL was allowed to enter the area of NLD telephony. Thereafter, early last year (2001), more than a year before managerial control of VSNL passed on to the Tata group, the government had reportedly "milked" VSNL when the company paid a massive amount of Rs 1,800 crore (Rs 18 billion) to the Union government as dividends.
Still, the government left behind an amount in the region of Rs 1,000 crore (Rs 10 billion) with VSNL to ensure that the company met its financial obligations to its foreign shareholders and also to implement its NLD telephony project.
What is evident is that the Union government, that had hardly batted an eyelid while treating VSNL as a "milch cow," now appears more than a little unhappy that the Tata group is behaving in precisely the same manner. (Remember, Mahajan claims his views have the backing of the Cabinet.)
In between the fracas between Mahajan and the Tata group, an unseemly war of words broke out regarding the role played by Rakesh Kumar during the May 28 meeting of the board of directors of VSNL.
Kumar is the government's nominee on the VSNL board and he also happens to be a senior deputy director general of the DoT in the ministry of communications and information technology.
The VSNL board stated that the decision to invest Rs 1,200 crore (Rs 12 billion) in TTSL had been "unanimously" approved.
The following day, May 29, Kumar send a letter to VSNL's company secretary and executive director, legal, Satish Ranade, claiming that neither the agenda of the board meeting nor a presentation made by N Srinath, VSNL's Director, Operations and CEO, Tatanova, had explicitly stated that VSNL would be purchasing shares of TTSL.
Kumar alleged that "vital information" had been withheld from the directors and that he had not given his "positive consent" on the investment decision. It had further been alleged that the agenda papers had not been sent a week before the board meeting which is a legal requirement.
Ranade's version was quite different. He claimed the agenda papers had been faxed to Kumar on May 21, a week before the board meeting and had been hand-delivered to him the following day. The VSNL company secretary pointed out that while the agenda papers had merely mentioned that the board would "consider inter-corporate investment up top the level of Rs 1,200 crore (Rs 12 billion) in the share capital of an Indian company holding a BSO (basic service operator's) licence," the name of Tata Teleservices had not been stated in the agenda papers.
Ranade claims that Srinath "verbally" mentioned TTSL's name during his presentation and that since Kumar did not express his dissent during the board meeting and had not asked for a vote, the VSNL board decision to invest in TTSL was considered "unanimous."
Who is lying and who is telling the truth is difficult to ascertain. Whether Rakesh Kumar acted under pressure from his bosses in the bureaucracy and in government to send a dissenting note the day after the board meeting as an afterthought, is not clear?
The government did not exactly cover itself with glory when certain unnamed officials first claimed that Kumar would be "suspended" for not opposing the VSNL decision to invest in TTSL and then, equally mysteriously, decided to put the suspension order on hold.
Whether or not the Tatas would relent under pressure remains to be seen, but few corporate groups have been able to successfully defy the Union government for long. The Tatas are unlikely to be the exception to the rule.
In all probability, VSNL will now constitute a sub-committee for investments (as Mahajan has advised) in which the two government nominees would be present. The role of the two independent directors on the VSNL board, Subhodh Bhargava (formerly of the Eicher group) and Suresh Krishna (of Sundram Fasteners) would also be closely watched.
The big question being asked is whether Mahajan behaved in the way he did because he had the interests of the country at heart or whether he succumbed to covert pressures from a powerful lobby - that could theoretically include representatives of BSNL and MTNL besides the Reliance and Bharti groups.
It is clear to all but the most naïve that for a corporate group, manipulating the bureaucracy and the government is a "simpler" way to take on competitors than to slug it out with them in the marketplace.
The fact that four powerful Indian and multinational corporate groups - the Tatas, the Birlas, BPL and AT&T - could come together in the form of Idea Cellular (formerly Batata) may have sent jitters down the spines of many a tough telecom player. The last has certainly not been heard about the VSNL controversy.
