How`s business

By: M K Venu
The VSNL Saga

Minister for Disinvestment, Mr.Arun Shourie, is caught in a peculiar dilemma. He has said on record that Videsh Sanchar Nigam Ltd(VSNL), the government owned international voice carrier, has huge reserves that need to be tackled in the run up to selling the company to a private party.
But why should massive reserves, about Rs 4,500 crore in VSNL’s case, become a liability? This question has a strange answer.The VSNL reserves need to be whittled down so that the book value per share of the company, as represented by the networth, also comes down sharply. This will help the government justify the sale of VSNL at a low price! This bizarre logic is being followed because the government recently announced a complete opening up of international long distance telephony, thus doing away with VSNL’s monopoly over its core business. With future income streams of the VSNL virtually destroyed, the government announced that it will invite bids for the sale of VSNL. But who will buy VSNL at this stage, is the moot question. Minister for Disinvestment, Mr.Arun Shourie, is caught in a peculiar dilemma. He has said on record that Videsh Sanchar Nigam Ltd(VSNL), the government owned international voice carrier, has huge reserves that need to be tackled in the run up to selling the company to a private party.
But why should massive reserves, about Rs 4,500 crore in VSNL’s case, become a liability? This question has a strange answer.
The VSNL reserves need to be whittled down so that the book value per share of the company, as represented by the networth, also comes down sharply. This will help the government justify the sale of VSNL at a low price!
VSNL’s current book value per share is about Rs.231 as of March 31 , 2001. Its market price is marginally below the book value, though the floating stock in VSNL is quite low.
Now the bids invited next week may not command anywhere near the market price simply because the future earning potential of VSNL has evaporated with international long distance having opened up.
By Shourie’s own admission, VSNL did not diversify at all in recent years to create new value in its business. So the net result is that the VSNL may get far less than its current book value. But the government will find it difficult to justify selling VSNL below its book value. That is why Arun Shourie is already creating public justification for selling VSNL at a lower price.
Shourie’s assertion that VSNL’s reserves are too huge is but a reflection of this state of affairs.
VSNL’s value was systematically whittled down by the Vajpayee-led government, which caused a huge fall in the share price by announcing in 1999 that it would advance the schedule committed to the WTO for removing VSNL’s monopoly over international voice telephony.
Vajpayee, prior to his visit to the United States, specifically made a big PR pitch that India was going ahead of its commitment to WTO by opening up long distance telephony two years prior to the deadline of 2004. The share price of VSNL began plummeting then. The VSNL share price has since fallen from about Rs.800 to Rs.225 now.
Some months ago, the government further eroded VSNL’s book value by giving itself a 500 per cent dividend. There was a massive Rs.900 crore transfer from the VSNL to the government as dividend.
The most bizarre aspect of earning such a high dividend is that the government has got no more than Rs.200 crore as receipts from disinvestment itself.
But it has got Rs.900 crore as dividend from one PSU!
The government might as well bridge its fiscal deficit through a reserve stripping programme rather than enact this elaborate charade of privatisation.
Sharing Business Platforms
Industrial recession is forcing corporates to think of innovative cutting costs methods and to create overall consolidation in sectors currently ridden with an overcapacity.
We see this happening in the auto and engineering sectors, where companies are reportedly sharing production facility simply because there is not enough demand for all the factories to operate simultaneously. This is also a form of consolidation where ownerships don’t merge but production facilities do helping cut costs in a big way.
This is now happening in the most unexpected of sectors—media. The financial daily, Business Standard, has decided to share four of its pages with another well known newspaper, The Statesman.
Similarly some of the local television media companies are also planning to create common resource pools so that overall costs are brought down.
This is just the beginning of what eventually may lead to consolidation even in terms of ownership patterns through joint equity participation.

Is Reliance finally changing its spots?
The Ambanis have finally realised the need to have foreign partners in executing some of Reliance Groups ambitious expansion programme. Traditionally, the Ambanis never believed in working with foreign partners, and had the arrogance of going about everything on their own steam. However, times are changing and even the Ambanis have realised that you need stable partners chipping in with both finance and technical knowhow, especially in technology-sensitive businesses like telecom and broadband services. Now there is some talk of Reliance Infocom getting into equity as well as technology partnerships with Qualcomm and Hewlett Packard to run their telecom services and broadband business in 18 circles.
Qualcomm is a leader in the CDMA technology, which Reliance proposes to use in providing WILL telephony. Hewlett Packard is expected to provide other technology solutions in creating an appropriate Internet Protocol Network.
What is interesting is the Ambanis, who are committed to raising over Rs.20,000 crore during the next few years, are now convinced of the need to have credible partners to help with both technology and international finance.
In its initial foray into this sector a few years ago, Reliance Telecom had Nynex Corporation as a partner. Later, they developed differences with Nynex and the latter withdrew.
But this time round, the Ambanis seem serious about stable partnerships. The Ambanis clearly feel the need to share risks in this highly sensitive sector, which cannot be run purely by influencing government policy!
Illustrations by Sharad Sharma