Saturday, January 10, 2009

Battle over Balco The sale of Bharat Aluminium Company Ltd.

CONTROVERSY continues to dog the Union government's first decisive sale of a controlling stake in a "big ticket" public sector undertaking (PSU), Bharat Aluminium Company Limited (Balco), the third largest aluminium producer in India. Although the sale o f 51 per cent of the government's stake to Sterlite Industries (India) Ltd for Rs.551.50 crores was consummated on March 2, after days of uproar in Parliament the battle is far from over.

The Balco complex at Korba.

Balco's 7,500-strong workforce at its main complex at Korba, about 275 km from Raipur, the capital of Chattisgarh, was quick to react. The workers went on an indefinite strike from March 3, in a last-ditch attempt to get the deal reversed.

The strident posture adopted by Ajit Jogi, the Chief Minister of the backward and predominantly tribal State of Chattisgarh, has given the workers a shot in the arm (see interview). The resistance meant that Sterlite was unable to take physical possessio n of the plant for several days. Sterlite's managing director S.C. Krishnan reached the plant only on March 8.

Ajit Jogi has opposed the deal on three counts. He alleges that Balco's assets have been sold for a song and that points to corruption at the "highest level of government", implying the involvement of the Prime Minister's Office (PMO). Speaking in the St ate Assembly on March 2 during a two-day discussion on a government resolution against the sale, he alleged payoffs into Swiss bank accounts. He said that he would prove his charges provided he was given a fair and appropriate platform, such as a Joint P arliamentary Committee. The government resolution was passed in the Assembly by 41 votes for and 19 votes against it. Ajit Jogi later claimed that the fact that only 19 of the 35 Bharatiya Janata Party members were present in the House to vote against th e motion indicated that there were fissures in the party.

Jogi has also opened another front, accusing the Centre of concluding the deal without taking his government into confidence. He has repeatedly denied the claim made by the Minister for Disinvestment Arun Shourie in Parliament that the Chattisgarh govern ment was consulted at every stage about the Balco sale. The Union government, he told Frontline, had dealt "a body blow to the federal spirit of the Constitution". Spokesperson of the BJP V.K. Malhotra added a new dimension to the worsening relati ons between the Union and Chattisgarh governments, when he announced on March 7 that Balco's losses due to the strike would be "recovered" from the Central assistance due to the State.

The third reason cited by Jogi for his opposition to the deal stems from his contention that the sale violates constitutional provisions on several counts, notably those aimed at protecting tribal people from being alienated from their lands. He has mars halled court rulings to back his contention that the sale jeopardises the interests of the tribal people. Indeed, the Korba district administration has already proceeded to take action in the matter; the Sub-Divisional Officer (Civil) has issued notice t o several persons, among them Anil Agarwal, Sterlite's chairman and managing director, Arun Shourie, and the Secretary, Ministry of Disinvestment, on the grounds that the Balco sale violates constitutional provisions meant to prevent tribal people from b eing evicted from their lands.

Union leaders addressing workers on the first day of the strike, on March 2.

Addressing the workers and their families at Balco Nagar, the company's sprawling township at Korba, on March 5, Jogi said: "The fight against the deal is over in the Lok Sabha, the Rajya Sabha and the State Assembly. It is now to be fought in the street s of Chattisgarh." In an emotion-charged speech, he said: "I have used all the powers at my command to stop and reverse the sale of Balco, which is so precious to Chattisgarh and its people." On March 10, Madhya Pradesh Chief Minister Digvijay Singh dema nded a review of the deal. He said that his government had only received a communique from a Central official and confirmed that it had not been consulted on the issue.

Although the now-disbanded Disinvestment Commission had initially recommended a 40 per cent divestment in Balco in 1997, the government decided to offload a controlling stake of 51 per to a strategic partner. On June 15, 2000, it invited bids for strateg ic partners. Initial media reports suggested that there were seven bidders for the "mini ratna", including global majors Alcoa and Kaiser and Indian companies, Hindustan Aluminium Company Ltd. (Hindalco) and Sterlite. The bids were submitted to Jardine F leming who were designated global advisers on the sale of Balco. Incidentally, Jardine Fleming also coordinated the National Democratic Alliance government's controversial disinvestment in Gas Authority of India Ltd. (GAIL) in November 1999 (Frontline , December 10, 1999).

The government was clearly on the defensive when the Balco issue was raised in the Rajya Sabha. The Opposition's onslaught elicited the first set of details about the deal on February 27 from Arun Shourie. Shourie said that Balco's screening committee se lected P.V. Rao and Co. for the valuation of the company's land, building, plant and machinery and the mines were valued by the Indian Bureau of Mines. The reserve price for the bid was Rs.514.40 crores for the 51 per cent stake in the company and a prem ium of 25 per cent was factored into the reserve price, he said.

Shourie said that Jardine Fleming used several evaluation methods to assess the bids. The discounted cash flow method for the 51 per cent stake was valued at Rs.332 crores to Rs.507 crores; comparable valuation method yielded a value of Rs.299 crores to Rs.464 crores; Rs.305 crores to Rs.348 crores if the 51 per cent stake was evaluated in terms of the balancesheet method. Shourie said that the asset valuation method would have yielded Rs.1,072 crores, implying that a 51 per cent stake would have amount ed to Rs.507 crores. He said that the evaluation committee, after "detailed deliberations", accepted the discounted cash flow method as the most suitable one for arriving at the reserve price.

The government agreed to a discussion in the Lok Sabha on March 1, owing to the pressure mounted by the Opposition as also the rumblings within the ruling coalition, notably from the Telugu Desam Party (TDP) and the Shiv Sena. In the Lok Sabha, Rupchand Pal of the Communist Party of India (Marxist) moved a motion against the sale. The TDP, which had launched an attack on the deal in the Rajya Sabha, changed tack in the Lok Sabha, where its member M.V.V.S. Murthy said that the "deal seemed to be transpar ent".

Workers on protest.

In his reply to the motion, Shourie challenged Ajit Jogi to arrange for a bidder who would be willing to pay more for Balco. "He (Jogi) says the company is worth Rs.4,000 crores. Let him get a buyer who is willing to pay Rs.4,500 crores. We will pay Ster lite Rs.500 crores and ask it to go," he said. Shourie said: "The two governments had, in fact, been helpful at each stage." Ajit Jogi was prompt to deny that he or his government had ever been consulted on the disinvestment proposal. He said he was read y to resign if Shourie could prove that he had been consulted.

The government was quick to consummate the deal after the Opposition's motion was defeated in the Lok Sabha - 239 votes against and 119 for, with three abstentions. Speaking hours after the government's victory, Anil Agarwal declared that the "deal will serve as a model for other disinvestment in the future". On March 2, Sterlite handed over a cheque for Rs.551.50 crores to and signed the share purchase agreement and a shareholders' pact with the Union government.

The same day, a Bench of the Supreme Court stayed the proceedings before the Delhi and Chattisgarh High Courts in petitions challenging the Balco sale and transferred them to itself. The apex court issued notice to the Balco employees' unions, the govern ment-appointed valuers, Jardine Fleming and Sterlite Industries.

On March 7, the Supreme Court, hearing an urgent application filed by the Union government, directed the Chattisgarh government to protect the workers and officers of the plant who wished to resume work. It also directed the State government to ensure th at essential supplies were not disrupted to those inside the plant. However, the Centre came under attack from the Opposition in Parliament. The Opposition charged it with attempt to break the peaceful strike by going to court on "false premises". Shouri e claimed that the government sought the court's intervention because it feared sabotage and "imminent danger" to the plant and a breakdown of law and order in Korba in view of the inflammatory statements made by political leaders of Chattisgarh.

The unions' position on the deal hinges crucially on the manner in which the valuation has been done. They allege that Sterlite's 51 per cent holding will enable it to control Balco's assets, which are in several multiples of the amount it has paid to ge t the controlling stake.

Chief Minister Ajit Jogi addressing Balco workers on March 5 at Balco Nagar.

Brahma Singh, general secretary of the Balco Employees' Union, which affiliated to the Indian National Trade Union Congress (INTUC), said that "the deal stinks". He told Frontline that on the day of the sale, the company had fixed deposits that am ounted to about Rs.350 crores. The company had invested Rs.200 crores in a cold rolling mill and a sheet caster, which, he said, had not even started commercial operations. "The government," he said, "has handed the brand new machinery on a platter to St erlite."

Brahma Singh said that there were Rs.90 crores worth of salable materials lying on the plant's premises. He said that Sterlite had now gained access to scrap worth Rs.50 crores, inventory worth Rs.70 crores and raw materials (caustic soda, fuel oil and b auxite) worth Rs.100 crores in the plant. In addition, Balco's 270 megawatt captive power plant had materials worth about Rs.100 crores on its premises on the day Sterlite took over the company.

Brahma Singh also said that the acquisition would enable Sterlite to have access to the more 3,000 acres (1,200 hectares) of land at Rs.2 lakhs per acre (based on a recent land acquisition by Balco). Brahma reckons that the value of the land in Balco's p ossession amounts to at least Rs.70 crores. He estimates the company's prime real estate possessions in Mumbai, New Delhi, Kolkata and Chennai at Rs.100 crores. The union leader feels that under these heads alone, and not taking into account Balco's plan t, machinery and equipment Sterlite has gained access to assets worth more than Rs.900 crores. Several experts have pointed out that the captive power plant is worth at least Rs.1,000 crores, even after accounting for depreciation.

The unions allege that successive governments have failed to protect Balco's long-term interests. Brahma Singh, now heading the seven-union front, said that Balco's expansion and modernisation had been neglected for a long time. "Money," he said, "is not the problem. The problem has been their attitude." Balco made profits continuously in the last 12 years; its debt-equity ratio has been rather favourable; it even had surplus cash reserves that could have been ploughed into expansion and modernisation p rojects.

Several senior Balco officials told Frontline that the company's proposals for modernisation had been pending with the Union government for nearly a decade. "All that Balco needed were procedural clearances from the government. We never expected m oney for the projects, estimated at between Rs.400 crores and Rs.600 crores at that time," said one. Instead of investing in Balco's expansion, the government withdrew half its equity stake during the current financial year, from Rs.489 crores to Rs.244 crores. In February 2001, on the eve of the sale to Sterlite, it withdrew a further Rs.23.80 crores.

Arun Shourie, Union Minister in charge of disinvestment.

A senior official, who has been associated with the company since the "jungle-clearing days" in the late 1960s, told Frontline that the aluminium smelter's capacity had remained at one lakh tonnes per annum (tpa) since 1970. Its alumina plant requ ired to be expanded from the current level of 2 lakh tpa to at least 5 lakh tpa in order to be in line with best practices across the world. "Today's technology is about 30 years old, we should have kept pace," he said. "We could not, not because we were inherently inefficient but because the government did not allow us to move on with the times." He complained that for several years, particularly after the onset of the reforms process, "new ideas have not been promoted at Balco". He explained that priv ate interests, referring sharply to a large Indian aluminium major, "worked to prevent Balco from emerging as a strong competitor". Referring to Balco's participation in the country's missile development programme, company officials also pointed to the s ecurity risks that would arise from the handing over of the company to a private entity.

The problems on account of the failure to modernise accumulated over the years. Balco's cost of production has been much higher compared to either Hindalco, the biggest aluminium producing company, which belongs to the A.V. Birla group, or the other stat e-owned aluminium major, National Aluminium Company Ltd (Nalco). Balco's weaknesses are mainly because of the higher power consumption as a consequence of its dated production technology. Moreover, Balco was also saddled with a loss-making private unit l ocated at Bidhanbag in West Bengal.

The seven major trade unions, under the banner of the Balco Bachao Sangharsh Samiti, have for over two years resisted the privatisation bid. Significantly, even the union affiliated to the Bharatiya Mazdoor Sangh, the trade union wing of the BJP has join ed the common platform.

The base of the struggle has widened in the qualitatively changed situation after the sale. A new platform, the Nijikaran Virodhi Samyukt Samiti (anti-privatisation front), was formed on February 28, accommodating not just the unions but all political pa rties barring the BJP. Other organisations, notably the Chattisgarh Chamber of Commerce, have also joined the platform. On the second day of the strike, the womenfolk of Balco Nagar participated in a torchlight procession. Said B.L. Netam, an activist of the Centre of Indian Trade Unions (CITU): "Balco's sale has provoked even our womenfolk, who are bound by traditional values, to come out on the streets."

V.C. Shukla, former Union Minister, who leads a Congress(I) group opposed to Jogi in Chattisgarh, visited Balco Nagar. Although he offered to lead the agitation, the trade unions do not want to be caught in the crossfire between the Shukla and Jogi camp s.

The struggle has been peaceful so far. In response to the Supreme Court's directive the unions have climbed down from their earlier stand that they would not allow Sterlite officials to enter the plant. Sterlite has invited the leaders of the seven union s to Delhi for talks. Brahma Singh said: "We do not recognise the Sterlite management, we will only talk to the Government of India."

Sterlite declared a lockout on March 10, alleging that the plant was in risk of being damaged. However, the unions have accused the company of precipitating a crisis by closing down the plant and blaming the workers for it. The workers were aware that th e smelter ran the risk of being damaged in the event of a complete stoppage of work. On the fifth day of the agitation, the core committee of the unions issued passes to more than 70 workers to enter the plant in order to keep the smelter alive. Netam s aid that the workers had offered shram daan (free and voluntary labour) to protect the plant. "After all," he said, "this is the hand that feeds us. How can we allow it to be destroyed?"

Jogi's opposition to the deal has rested on the premise that it violates the hopes and aspirations of Chattisgarh. He argues that the land on which Balco stood was acquired from tribal people. He contends that since the company is no longer a publicly ow ned entity the land should be returned to its original owners. Jogi has also cited legal provisions as a means to prevent Sterlite from enjoying access to the bauxite mines hitherto operated by Balco.

Shyamlal Maravi, vice-president of the Chattisgarh Adivasi Vikas Parishad, told Frontline that land from scores of tribal hamlets was acquired after Balco was incorporated in 1965. In most cases, the owners were paid Rs.20 per acre.

Although the government and Sterlite have said that there will be no retrenchment for at least one year, there is a widespread fear that the new management will shed workers in significant numbers after that point. Sterlite's corporate reputation is also a point of animated discussion (see box). Shourie assured Parliament that the company was committed to a lock-in period of three years and that it would not be allowed to strip the assets of the company. However, analysts say that it will be difficult t o prevent a shareholder with a decisive controlling stake from actually doing this.

Cynics within the Congress(I), notably those belonging to the V.C. Shukla camp and elsewhere, have warned the workers that Ajit Jogi is making political capital out of the issue. However, those sympathetic to him say that the Chief Minister has establish ed his tribal credentials beyond doubt. The workers place much hope on Ajit Jogi's support, but the success of their agitation will depend on how far Ajit Jogi would go.

The valuation of a company's assets is always tricky business. Much depends on the expectations of profits, the size of the assets and liabilities, goodwill, and other factors. Critics of the reforms programme have been demanding that the replacement cos t of existing assets of a PSU should be factored into the valuation. This method, they say, would set a benchmark price, determined by what it costs for a purchasing entity to set up a similar production facility with assets of a comparable size. The fac t that murky deals are suspected irrespective of the nature of the offloading exercise - through the stock markets or through "strategic sale" - only indicates that privatisation is nothing but the sale of public assets for private benefit at a substanti al discount.

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