VSNL-Tata Teleservices Crossfire

After a two-week long standoff, the VSNL controversy seems to have reached a

conclusion. The point is not that it’s finally settled in favor of the

investment. The issue is whether the attempts to curb the decision were called

for. After selling it’s majority stake in a public sector unit, why should the

government still want to hold control over the entity?

Pan on to the other side. As a 26% stakeholder in VSNL, doesn’t the

government have the right to question any management decision? If the government

sees any discrepancies in an investment decision, shouldn’t it take action?

Shouldn’t privatization norms be stringent enough to avoid any unscrupulous

act by the investing company? Well, yes. The answer to all the above questions

is affirmative. There is nothing wrong if the stakeholders of a company have a

difference of opinion and they have a healthy discussion to resolve the

differences. One party can raise questions and the other can present details to

satisfy it. After all, this is what corporate governance is about–transparency,

crystal clean ethics and accountability!

Pramod Mahajan communications minister “As a stakeholder with 26% of the holdings in VSNL, the government has a right to talk to the corporate house. We have asked the Tatas to review the decision”

PSUs needs freedom



According to disinvestment minister Arun Shourie, the communication ministry’s

attempt to discipline Tatas wasn’t in line with the objective of the

privatistion. After disinvestment, ideally a public sector company should be

free from interference of the government. The board of directors should be

allowed take such strategic decisions independently. Instead of putting

pressure, the government should respect their decisions. Shourie also points out

that messing up with VSNL will leave it hamstrung when it comes to competing

with rivals like Reliance and Bharti which enjoy flexibility in investment

decisions and don’t have to go in loops.

Although the government principally agrees to disinvestment, its ‘need-to-control’

attitude is not really conducive to the process. The ministers have got so used

to power that they find it difficult to live without it. Analysts fear that the

hostile attitude displayed by the government in this case might discourage

private players to bid for PSUs in future. "Such incidents are casting a

shadow on the disinvestment process. This is scaring away bidders," says

Shourie. He believes the Tatas had not infringed the shareholders’ agreement

by taking an investment decision that they needed to take for the sake of its

survival.

"We have not violated any laws, any provisions of the Companies Act nor

any disinvestment rules," says VSNL managing director S K Gupta.

Is it a wise decision?



Mahajan had asserted that the Tatas’ decision raises serious questions about
the group’s commitment to business ethics.

Whether the Tatas adhered to disinvestment rules or not, whether their move

was ethically right or not, the fact is that the board members are legally

authorized to take such a decision. Therefore, the concern should be to evaluate

the long-term implications rather than question the validity. It is important to

assess whether it is a wise investment and in the interest of its shareholders.

Arun Shourie disinvestment minister “Beware of increased corporate rivalry, which is casting its shadow on the disinvestment process. This is scaring away prospective bidders”

Explaining the logic behind the VSNL board decision, the Tatas say VSNL needs

to have a controlling stake in a basic telephone service provider for its own

survival in a highly competitive telecom environment. Out of a total of six

private players, currently offering basic telephony in the country with a

combined customer base of 5 lakh, Tata Teleservices boasts of 1.5 lakh customers

in Andhra Pradesh, where it has already started full fledged operations. This

puts Tata Teleservices among the three top private operators along with Hughes

Tele and Bharti, which have almost the same customer base.

The objective of the investment, therefore, is to gain access to customers.

The argument put forth is that VSNL’s international long distance (ILD)

services suffer from a major handicap–it does not have any access to the end

user of its services. The basic and mobile telecom companies using VSNL services

control this interface. This is seen as a major handicap for VSNL going forward,

as all the basic and cellular telecom players, including Bharti, Reliance,

Bharat Sanchar Nigam (BSNL) will have their own ILD gateway. Therefore, VSNL

needs to invest in TTL and get direct access to customers. Through, the

strategic investment of between 20 to 26% VSNL intends to own TTL’s customers.

The lessons learnt



VSNL and Tata Teleservices are key players in the telecom sector. If Tatas’
with their investment plan are able to capitalize on the leadership of both

companies, the decision could prove quite fruitful in the long run. While some

questions have been raised about the valuation amount, market analysts seem

convinced about the investment strategy as such. According to a report by

Merrill Lynch, "...at a cost of Rs 1,200 crore, for a stake believed to be

around 25 per cent, we believe that the deal is premium priced." However,

it says that its strategy of investing in an access provider is sound.

While a go-ahead has already been given, VSNL and the Department of

Telecommunications have come to an understanding to closely monitor the

investment. A sub-committee of the Videsh Sanchar Nigam board will decide on the

quantum, valuation and price at which the investment will be made. It will also

decide the tranches and periodicity of fund infusion. The sub-committee, which

has a government nominee on board, will also negotiate, finalize and execute

contractual agreements with Tata Teleservices in order to protect VSNL’s

commercial interests.

SHWETA VERMA, in New Delhi

Run Up to the Standoff

28 May 2002: VSNL to invest Rs 1,200cr in TTL



VSNL announces plan to invest Rs 1,200 crore in Tata Teleservices, a
wholly-owned outfit of the Tatas

29 May 2002: Mahajan furious at VSNL decision



Pramod Mahajan takes serious objection to VSNL’s decision of funding Tata
Teleservices, saying it was taken "without consulting the government".

Decides to take serious action against the two government nominees on the VSNL

board

30 May 2002: Tatas reaffirm their stand



Tata Group representatives on the VSNL board stick to their stand. They also
defend the decision, saying the investment is crucial to VSNL’s survival and

does not violate any laws, any provisions of the Companies Act, or any

disinvestment rules

31 May 2002: Mahajan threatens Tatas, wants decision

reversed



Pramod Mahajan issues a none-too-veiled threat to the Tatas, urging the group to
reverse the VSNL decision to invest in TTL. He also indicates that he could

explore legal options to protect the interest of the stakeholders

1 June 2002: Disinvestment ministry defends Tatas



The disinvestment ministry defends the Tatas, saying it does not find any fault
in the Tata-led VSNL decision to invest in its sister firm. Mahajan gets irked

by disinvestment minister Arun Shourie’s "attitude"

1-4 June 2002: Speculation heats up as DoT steps in



Mahajan considers various options, including blocking the special resolution, if
the Tatas go ahead with the plan. The market heats up with speculation. DoT

(Department of Telecommunications) steps in, asks Tata to reconsider its

decision. Will the Tatas roll back the decision?

04 June 2002: Shourie reacts sharply to criticism,

consults home ministry



Amidst the raging controversy, Arun Shourie defends his ministry’s role in
VSNL’s disinvestment. Reacts sharply to reports of criticism by BJP over the

deal and the issues of ethics, saying that he has already spoken to home

minister LK Advani.

05 June 2002: Mahajan-Shourie standoff



The situation reaches an almost deadlock between the two ministers. BJP
officials try and defend the situation to save the government’s image.

6 June 2002: Mahajan softens, decides to talk to

Tatas



After long discussions with disinvestment minister Arun Shourie in the presence
of home minister LK Advani, Pramod Mahajan softens stand. Says he would soon

talk with the Tatas, and explore legal options only if the talks fail

6 June 2002: Shourie, Mahajan begin resolving

differences



The two ministers jointly meet Home Minister L K Advani for the second time. The
BJP leadership asks both to resolve their differences. Mahajan and Shourie

reinstate that there are no differences in the government and BJP over the

process of disinvestment, and the remaining issues are being sorted out

10 June 2002: VSNL gets green signal



Tatas finally manage to convince the Centre on the merits of the their decision.
VSNL is allowed to go ahead with the investment, even as it agreed to have a

sub-committee to closely monitor the process