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Govt as shareholder - double jeopardy

By R Jagannathan
August 26, 2003 13:31 IST
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The NDA government needs to be thanked profusely for conclusively proving the case for public sector shareholding reform. It's obvious I don't mean this as a compliment.

By action and inaction, it has demonstrated that government servants and ministers need to be kept as far away from commercial public sector undertakings as possible.

In particular, no listed public sector company should ever have to kowtow to, or take orders from, a bureaucrat or politician.

News reports say that a group of Videsh Sanchar Nigam Ltd investors in the US is suing the company for destroying shareholder value.

They believe that the government's decision to end VSNL's monopoly in international telephony two years ahead of schedule has diminished the value of their shares. I'm not surprised. I only wonder why it took them so long to realise that the government had gypped them.

In fact, all former minority shareholders of VSNL -- domestic and international -- have a right to sue the government for non-transparency in how it handled the monopoly issue.

The issue is not whether the government should -- or should not -- have brought forward the end of VSNL's monopoly. Any popularly-elected government has the absolute right to do so in public interest.

However, this right -- however capricious it may seem to the affected party -- can exist only if the government does not arrogate conflicting roles to itself -- of prosecutor, judge and accused.

And that, unfortunately, is the case with VSNL -- not to speak of most other public sector enterprises.

When government makes policy and regulates industry, it must not run businesses that can be affected positively or negatively by its actions.

In the case of listed public sector companies, there is another conflict: as part-owner of a company, the government has no business to act against the interests of its own minority shareholders, even though it can justifiably claim it has damaged its own interests as majority shareholder (as in the case of VSNL).

This is double jeopardy: dubious government action works not only against the interests of minority shareholders, but taxpayers, too.

Let's see how this applies to VSNL's case. If the decision to end VSNL's monopoly ahead of schedule had been taken when the company was 100 per cent owned by the government, there would have been no problem.

But once there were minority shareholders involved, the process had to be transparent. The government had to separate its role as policymaker and as owner of VSNL.

It didn't. Instead, it assumed that since it was the majority shareholder it need not worry about what its decisions would do to VSNL's share prices.

The government, in its role as VSNL's promoter, clearly did the dirty on investors. When VSNL listed its shares in India and abroad, its prospectus clearly indicated that the company would have a monopoly in international telephony till 2004.

This was the reason why investors subscribed to the issue. This was also the reason for VSNL's high initial valuations.

Granted, government can change its mind, but was it transparent in how it compensated VSNL for the loss of monopoly? If an independent party were to assess the real cost of loss of monopoly against the compensation given in return, he would find that the government grossly undercompensated VSNL for it.

But why didn't the VSNL management protest? Simple: You don't oppose people who pay you your salary. That's where the government's conflicting roles -- as shareholder, boss, and policy-maker -- did the most damage.

When VSNL's compensation was being decided, its top brass were not 'free agents'. If they were, they would have gone to court demanding fair compensation.

In contrast, consider how VSNL top management actually behaved at that time: Did you see a flurry of activity to invest in new businesses and generally prepare itself for loss of monopoly?

Were its top officials shouting themselves hoarse about being robbed by the government? Not one yip out of them. Then consider the noise made by Pramod Mahajan when the Tatas wanted to use VSNL's funds to invest in Tata Teleservices. All hell broke loose.

There's no doubt in my mind that the VSNL management caved in and signed on the dotted line when it came to accepting the government's compensation offer.

In the process, they sacrificed the interests of minority shareholders. Not only that, the taxpayer got very little return on his ownership of VSNL, thanks to the depreciation in the company's share prices.

Barring an out-of-court settlement -- which I doubt very much -- the VSNL lawsuit is going to sully the image of the government of India before international and domestic investors like never before.

The government can claim sovereign immunity, but everyone will know that it has acted less than fairly towards minority shareholders. The only way to remedy this is by making commercial undertakings 'free agents' again by privatising them, or, in the interim, by delinking ministries from control of these companies directly or indirectly.

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