Balco - The Disinvestment Story

8/3/2019 Balco - The Disinvestment Story

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"The deal was like loot of Chattisgarh in a day-light robbery."

- Chattisgarh Chief Minister, Ajit Jogi. "Sterlite's offer for Balco is more than fair. It is in the interest of the government to close the deal."

- BusinessWorld, March 12, 2001. Balco - The Disinvestment Story: IntroductionIn February 2001, the Government of India (GoI)struck its first disinvestment deal in the fiscal 2000-01.It approved the sale of its 51% stake in aluminium

major, Bharat Aluminium Co Ltd (Balco) to SterliteIndustries Ltd. (SIL), for Rs. 551.5 crores. Balco was aprofit making public sector company under the Ministry

of Mines (MoM). In 2000, it had a turnover of Rs.898

crores and a profit after tax of Rs. 56 crores.

Balco had two working units - an integrated Aluminium

complex situated at Korba in Chhattisgarh and thesecond at Bidhanbag in West Bengal equipped toproduce only on downstream facilities. Balco had a

total workforce of 7,000.

The Opposition launched a massive attack accusing the

BJP Government of 'selling out' to private interests.

Also, the Chattisgarh Chief Minister, Ajit Jogi, (Jogi)alleged a Rs. 100 crore kickback in the sale involving

key officials. Jogi also threatened to cancel the bauxitemining and land lease Balco was granted as a Public

Sector Unit (PSU) in case the GoI failed to review theproposal.

Fierce opposition to the Balco-Sterlite deal forced the BJP government to put off finalizing

the sale agreement till the matter was discussed in the Parliament. In March 2001, theParliament approved the controversial deal with the opposition-sponsored motion being

rejected in the Lok Sabha by 239 to 119 votes. But the story did not end here. Theemployees union launched an indefinite strike protesting against the Balco sell out.

After a protracted battle, an agreement was reached between the Balco management and

the union. With this agreement, the Balco disinvestment saga was put to rest. But, with the

employees not completely satisfied with the terms and conditions laid down in theagreement, the future of Balco did not seem to be very promising. Balco - A ProfileBalco, incorporated in 1965, was closely associated with the growth of the Indian Aluminiumindustry. Balco played a pivotal role in making aluminium a leading metal with myriad uses

ranging from household, industrial to strategic defence and aerospace applications. Balco

was vertically integrated from sourcing of bauxite from its captive mines, refining andsmelting to aluminium production and a variety of semi finished products.



Balco had contributed significantly as a primary aluminium producer, providing sustenance

to vital industries. Balco was a supplier of special aluminium alloys to the nation'sintermediate range ballistic missile, Agni and surface to surface missile, Prithvi. The GoIheld 100% stake in Balco. In 2000, the GoI announced to divest 51% stake in Balco to a

long-term strategic partner.

Balco - A Profile Contd...

TABLE IPRODUCTION FACILITIES

Korba Plant Bidhanbag Plant

200,000 tonnes per annum capacity

Alumina plant.

Hot and Cold Rolling Mills (3600

tonnes capacity).

100,000 tonnes per annum capacitySmelter.

One Extrusion Press (1250 tonnescapacity).

Three wire rod rolling mills formanufacture of Aluminium redraw

wire rods.

Foil Plant (600 tonnes capacity).

Three Extrusion Presses (3150

tonnes, 2500 tonnes and 800tonnes capacity).

Conductor Plant.

Hot and Cold Rolling Mills (40,000tonnes capacity).

274 MW power plant.

Stage I: The Tug of War In mid 2000, leading domestic players like the AdityaBirla group company-Hindalco Ltd, SIL and the global

major, Alcoa, expressed their interest to acquire 51%

controlling stake in Balco. They had to verify thefinancial and operating performances of Balco before

putting in a financial bid for purchasing the 51% equity

on offer.

Once the financial bids were received, majority stake

in the company would pass on to the highest bidder.An inter-ministerial group (IMG)1 was constituted to

oversee the disinvestment process. In late 2000, thegroup visited the Balco plant (Korba) to get a first-

hand impression of the plant and its facilities, itsoperation and the mood of the employees prior todisinvestment.

The Balco disinvestment was mired in controversyright from the day it was announced. The employees'union of Balco put up a stiff resistance to the

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disinvestment process. The union alleged that the MoM

was adopting coercive means to complete the process.

In a memorandum to the Prime Minister, A.B. Vajpayee, the union alleged that the MoM was

'behaving like a guilty conscious culprit' and resorted to enforcing Section 144 in and around

the Balco plant even before the Committee of IMG arrived. "Although the situation did notwarrant it, the Government of Madhya Pradesh2 had deputed thousands of policemen in

plain clothes and uniform to terrorize the employees and facilitate the IMG Committeemembers' visit to the plant to achieve their motive. Today, the workers of the PSU are more

worried about their survival and protection of their service conditions subsequent to thedisinvestment," the union said.

The union cited that Balco was a profit-making company and had a huge capital base of about Rs. 500 crores. It was the only public sector enterprise that had paid its 50% equity,

i.e., Rs. 244 crores to the exchequer. The government should not jeopardise the future of the workers by disinvesting it. Government officials, however, pointed out that in the late

1990s, only 50% of Balco's profits had been on account of operating margins while the

other half was due to interest earned on fixed deposits. The GoI further said that Balco was under threat as the company was running on outdatedtechnology and was making profits only because aluminium prices in international market

were ruling high. A downturn in prices would again take the company to the state of

sickness from which it had recovered in 1988-89. The GoI stand was that it was better tosell the company when it was earning profits to get a good deal.

The GoI said that the cash reserve of Rs 437 crore accumulated by Balco by giving lessdividend to the government was too little for the modernization of the company. Accordingto government estimates, a total of Rs 4,000 crore would be required for the modernization

and expansion of the company and it could be infused only by bringing in a strategic

partner.

Stage I: The Tug of War Contd...

In late 2000, to win the confidence of the agitating employees, the GoI for the first timeannounced its decision to offer stock options to the employees of Balco. It also stated that

there would be no retrenchment of labour in Balco for at least one year after thedisinvestments. In case of any decision to reduce the manpower, it would have to offer a

package not less attractive than the government approved VRS package.

Meanwhile, opposition to the disinvestment wasgrowing, with the union submitting a memorandum to

the Prime Minister seeking his intervention. Theemployees alleged that proper evaluation of the

company had not been done. They noted the cost of

the Korba aluminium plant and Bidhanbag plant, land,

quarters and buildings (Rs 800 crore) and new cold-rolling projects (Rs 184 crores), has been grosslyunderestimated.

The union also alleged that there were several lapsesin the tendering process. As per the existing tendering

procedure, bids were to be invited from minimum six

parties and the GoI tendering procedure indicated thatthere should be a minimum of three parties. However,both had not been followed.






In February 2001, the union filed petitions with theDepartment of Company Affairs (DCA) and theMonopolies and Restrictive Trade Practices Commission

(MRTPC) on the disinvestment process being

undertaken in the company.

The union in its petition to DCA said that several factors such as fixation of reserve pricebefore the start of the disinvestment process, valuation of the company by GoI and non-

settlement of pending dues by many of foreign and domestic parties have not been takencare of. "The process (disinvestment) is likely to be completed without valuation of assets of

Balco on fair market value as recommended by the disinvestment commission," the union

said.

In February 2001, the GoI approved the sale of 51% stake in Balco to SIL for Rs 551.5crore. The Cabinet Committee on Disinvestment, at its meeting, endorsed the sale of

Government equity in Balco along with the transfer of management control to the highest

strategic bidder. SIL emerged the winner beating the A.V. Birla group's Hindalco and theUS-based Alcoa.3 Said Arun Shourie (Shourie), Disinvestment Minister, "The bid of Sterlitecompares well with the expectation that the Government had formed with the reserve

price." However, he did not disclose what the reserve price was except that it was less than

the price quoted by SIL.4 "Apart from the highest price, the business plan of Sterlite was themost credible," Shourie added.

Dispelling fears on the employees' future post-disinvestment, Shourie said that in the first

year after the takeover, there would not be any retrenchment at all. After the first year, if any retrenchment took place, the VRS package offered would be as generous as the VRSpackage prevalent in PSUs. "The trade union leaders have expressed great satisfaction in

this clause," Shourie added. He reiterated that the entire process was concluded in a

completely transparent manner after exercising due diligence at every step.

Stage II: The Controversy DeepensThe deal between the GoI and SIL had attracted considerable flak mainly from the

Opposition. There was a niggling doubt over the deal, which seemed to be a reflection of thelack of transparency. The GoI said that the bids were valued by four different

methods.5 However, the value arrived at by these bids was not disclosed. Again, the reserve

price was not disclosed nor the value of the bids by Hindalco and Alcoa and whether theywere higher or lower than the reserve price.Stage II: The Controversy Deepens Contd...

On 23 February 2001, Hindu Businessline wrote, "It is entirely understandable, indeed evennecessary, that an element of secrecy is maintained when the bidding process is on. Butonce it is finished, and the government's decision has been communicated, it would have

been better to have disclosed all the facts. Thus, the Government has lost an opportunity to

lay down new norms of transparency for similar big-ticket disinvestments."

In a bid to placate the Opposition in Parliament, the

GoI decided to defer the signing of Balco sale paperstill a debate took place in both the houses of theParliament (Lok Sabha and Rajya Sabha). Meanwhile,

the tug of war continued unabated between the GoI

and the Opposition. Both Houses of Parliament,reiterated their demand that no assets of the company

be transferred till it was discussed threadbare and

okayed. Shourie, however, maintained that there wasnothing wrong with the valuation.

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Meanwhile, in another significant development,Chhatisgarh Chief Minister Ajit Jogi (Jogi) accused theGoI of indulging in 'underhand dealings' to the tune of

Rs 100 crore to sell off 51% stake in Balco to SIL and

alleged the Prime Minister's Office (PMO) was also

involved in 'irregularities.'

"Some functionaries in PMO are said to have received

kickbacks to the tune of Rs 100 crore for divestment of Government's equity in Balco at a throw away price.

The deal was like loot of Chhattisgarh in a day-light

robbery," Jogi alleged.

When asked to name the functionaries involved in the alleged 'scam,' he declined to discloseany details, but claimed that four to five people, including a top official of Disinvestment

Ministry were involved in it. Jogi claimed that the sale of Balco equities would have fetched

at least Rs 5,000 crore. He said Balco with a cash deposit of Rs 450 crore and annual profitof Rs 100-150 crore were being sold for a paltry Rs 551 crore. He warned the stategovernment would reconsider transferring lease of land and mines to SIL if the GoI

remained adamant on its decision.6

In response to Jogi's allegations, Shourie said, "Jogi's calumny - that some officials have

received Rs 100 crore in the Balco disinvestment decision - is so ludicrous as to border on

the idiotic. First, every bit of the work within Government was done by the officials of theDepartment of Mines and of Disinvestment. At no stage, whatsoever was any official of thePrime Minister's Office involved in the least." He further added, "Secondly, in this case, as in

every case of disinvestment, at every stage decisions were taken by groups of officers and

ministers: by the Inter-Ministerial Group. At every stage of the selection of the adviser, of the selection of valuers, and eventually of the selection of the strategic partner the selection

was made on the basis of open, competitive bidding.

In the final stage, two bids were received in sealed covers. One bid was twice the amount of

the other. It was clearly above the reserve price that the Evaluation Committee haddetermined. The Evaluation Committee consisting of officials from several ministries and the

adviser recommended that this bid be accepted. The Core Group of Secretaries endorsedthe recommendation. The Cabinet Committee accepted the recommendation. The entireprocedure was open, indeed it was mechanical. There was absolutely no reason for anyone

to pay nor any occasion for anyone to expect anything,"

In a statement Shourie, said, "In the circumstances, I challenge Jogi to name a singleperson connected with the central government - official or non-official - who has taken a

single paise in the entire process. I pledge that Jogi should have the courage to do so he willface the consequences in the court. The moment Jogi names the person, he will be taken tocourt for both criminal as well as civil prosecution."

Stage II: The Controversy Deepens Contd...

Analysts felt that the GoI got a good price for the 51% stake sold to Balco. Said Roddy Sale,managing director and head, investment banking, J.P.Morgan, "Sterlite followed every rule

in the book and was willing to pay a substantial premium to regular valuation."

BusinessWorld wrote7, "Also remember, Hindalco was willing to pay only around half theamount Sterlite is willing to put up, while the overseas companies backed out altogether.That alone should be enough to make Jogi and company embrace Agarwal warmly."

Stage III: The Debate

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Meanwhile, the Opposition demanded a Joint

Parliamentary Committee (JPC) probe into the Balcodeal. The GoI rejected the demand for a JPC probeleading to a walkout by the entire Opposition in the

Rajya Sabha. Shourie tried to convince the Opposition

that the GoI had got a good price on the transaction,

and that the deal was above board and urged them notto create hurdles in its path. Most members, however,alleged that the deal had been manipulated at some

level in the government.

Towards the end of the seven-hour debate, the

Opposition staged a walkout after its leader ManmohanSingh (Congress I) asked Shourie to reconsider the

demand for setting up a small JPC to go into the Balcodeal to ensure its transparency and vindicate GoI.

However, Shourie dismissed the need for a JPC probe

and emphasized that an assessment by theComptroller and Auditor General (CAG) would be

sufficient. The CAG's findings could be taken up forscrutiny and discussion by Parliament, he said.

However, the Opposition remained adamant and charged the GoI of selling the Balco shares

'for a song.' The Opposition was of the view that various calculations had put the worth of

the company at over Rs 2,900 crore as against the disinvestment price of Rs 551 croreagreed to by the GoI. Terming Balco's valuation as faulty, the Opposition said, Balco'scaptive power plant alone could fetch Rs 1050 crore and demanded that the cost detail

analysis be laid in the House. They questioned the manner of evaluation undertaken by the

GoI. Defending the valuation method, Shourie said, "The appropriate method for valuationof a going concern was the method of discounted cash flow.

After it was followed, the government, for abundant caution, had also asked the advisors to

assess the value of the company by two other universally recognised methods. For 51% of the equity, the advisors placed the valuation through discounted cash flow method at Rs

332-507 crore; through the comparable valuation method at Rs 299-464 crore and throughthe balance sheet method at Rs 305-348 crore." Shourie further said, "Only the governmentapproved valuers did the job. A screening committee of Balco selected PV Rao and

Co8 through competitive bidding for valuing the land and buildings, and plant and

machinery. The mines were valued by experts from the Indian Bureau of Mines. The valueof the assets was placed around Rs 1,072 crore, 51% cent of which would be around Rs 547crore."

On March 1 2001, voting on the controversial Balco deal took place in the Lok Sabha. TheParliament approved the controversial Balco deal, with the opposition-sponsored motionbeing rejected in the Lok Sabha. The motion was defeated by 239 to 119 votes. On March

2, 2001, a day after surviving the Opposition-sponsored motion in Parliament, the GoI

moved swiftly to sign the shareholders agreement for the sale of 51% stake to SIL.9 SILhanded over a cheque for Rs 551.50 crore to the GoI for acquiring management control of

Balco. On March 3, 2001, the management control of Balco was transferred to SIL.

The shareholders agreement provided for a lock-in period of three years. SIL wouldn't sellany part of its 51% stake for a period of three years after acquiring management control of

the company. However, the Government was free to sell its remaining 49% stake any time,

on which SIL would have the first right of refusal. The agreement also contained clausesprohibiting asset stripping by SIL within a specified time-frame. SIL also agreed not to











retrench Balco's 7,000-strong workforce for a period of one year. For any retrenchment

beyond a year, the workers would be offered a voluntary retirement scheme (VRS) package

equivalent to one approved by the Government for PSUs.

Stage IV: Post Sell Out Drama After the sell out of Balco, Jogi continued to fire his salvo and demanded a parliamentary

probe into the deal. Jogi alleged that the company was sold at a tenth of its actual value. He

said, "In a deal in which property worth Rs.5,000 crore to Rs.6,000 crore (Rs.50 to 60billion) is being sold for just Rs.551 crore (Rs.5.51 billion), the circumstances speak forthemselves." In an interview published in a national daily, The Indian Express, Jogi alleged,

"You are talking of transparency. But your transparency is such that even the chief minister

of the state did not know that this company is being sold.

They did not take anyone into confidence. The entire

deal was struck surreptitiously." "Arun Shourie istelling lies. He is a liar. Let him give even a singleexample when he consulted me, when he contacted

me on Balco," Jogi charged in the interview.Demanding a probe by a joint parliamentarycommittee (JPC), Jogi said, "Whenever such kinds of

scams take place, it is not done in the presence of

witnesses. Since big money and big people areinvolved, it should be probed." Contending that thedeal took place 'without taking the people into

confidence,' Jogi said his government was ready topurchase the company for the same amount that hadbeen paid by SIL. "It is a question of fighting for the

people's right, especially for the tribals of

Chhatisgarh," he asserted.

Meanwhile, Jogi started instigating the employees togo on strike, and encouraged them not to let themanagers run the plant. On March 3, 2001, theemployees launched an indefinite strike. The agitation

by the employees brought the operations of the plant

to a standstill. Apart from productivity loss, there wereapprehensions that the employees would resort to

damaging the plant facilities.

The GoI moved the Supreme Court to prevent the state government from disrupting thework at the Balco (Korba) plant. The Supreme Court restrained the Chattisgarh government

from disrupting supply of water, electricity and food to the Balco plant or township at Korba.

In its order, the division bench of the apex court said, "The state of Chattisgarh, and chief secretary and the director general of police in particular, are directed to afford full

protection to the workers, their families and management inside and outside the Balco plantat Korba, so that they do not suffer physical harm of any kind."

The Parliament witnessed heated exchanges between Opposition and ruling party with theOpposition questioning the GoI's propriety in moving the Supreme Court without taking the

Chattisgarh State into confidence. Countering the Opposition charges, Shourie said theCentre had received 'alarming reports' that water and electricity to the Balco plant would be

cut and the managerial staff would not be allowed to enter the state. He added that the



issue had turned into a law and order problem after an ambulance was burnt and a CISF

van damaged by activists.

Dismissing the Opposition's charge of not consulting the State Government, Shourie saidthe Disinvestment Secretary had written to the Chattisgarh Chief Secretary about thedisturbing reports and the possibility of damage to the plant, but there had been no

response. Meanwhile, the controversy surrounding the sale of Balco continued unabated,

even as Shourie requested the Comptroller & Auditor General, VK Shunglu to assign officialsto scrutinize all documents pertaining to the privatization of Balco. Major trade unions

refused to relent and called for a country-wide protest on March 20, against Balcodivestment. The trade unions also planned a country-wide strike and hartal.

The GoI warned the state government in Chattisgarh that the Centre could recover the

losses suffered by Balco from the state grants, if it continued its belligerent attitude on the

ongoing strike. The statement said, "The Centre holds 49 per cent share in Balco and if the

Congress government led by Ajit Jogi does not allow resumption of working of the company,the Centre could recover the money from the assistance given to the state." Meanwhile, theindefinite strike by Balco workers at Korba, continued for the fifth day.

Stage IV: Post Sell Out Drama Contd...

On March 9, 2001, the Balco deadlock took a new turn with the senior Balco officials

claiming that the smelter at the plant had started cooling with 40 pots of the cell house of the smelter plant having frozen. To restart operations, it would require about Rs 50 croreand three to six months time. S.C Krishnan, managing director, Balco along with four

members of parliament rushed to Korba to review the situation. However, the Balcoemployees union said that this would only aggravate the situation. All major trade unions

expressed their support for the 'ongoing struggle of the Balco workers'.

Jogi said his government would provide adequatesecurity to workers and management of the Balco

plant at korba as per a Supreme Court directive and

suggested a dialogue between the workers andmanagement to resolve the ongoing crisis. The

management also appealed to the workers to rejoin

work to save the smelter. The management threateneda lockout unless the employees returned to work. Saida senior official, "The company has not yet declared

lockout. However, if employees do not return to work,lockout may be inevitable."

On March 12, 2001, the GoI rejected the state

Government's offer to buy the 51% shares for Rs 552crore, which were sold to SIL at Rs 551.5 crore. Itsaid, the deal was complete and couldn't be reopened

as the GoI had already transferred its 51% stake toSIL on March 2, the day after Parliament approved thedeal.

In April 2001, all central trade unions includingBharatiya Mazdoor Sangh and INTUC gave a joint call

for a nationwide demonstration to express solidarity

with the striking employees in Chhatisgarh.

The Trade unions asked workers of all public sector undertakings to participate in a

nationwide strike on May 18, in support of the striking Balco workers. In May 2001, the new

Balco management offered two months salary advance to the striking employees to returnto work. This was rejected by the union. The management said it was ready to give the two



months salary advance and negotiate all industrial demands with the workers but not the

issue of disinvestment.

Also in May 2001, the Supreme Court asked the workers to resume work on assurance of advance payment by the Balco management. The Balco management also filed an affidavit

before the Supreme Court that no workers would be retrenched even though the

shareholders' agreement allowed it to do so after a year. On May 4, 2001, a marathonmeeting of the union was held to discuss the issue of withdrawing the strike in view of the

Supreme Court's directives.However, the union failed to take any decision. The union blamed the Balco management

for failure of talks. Said, Brahma Singh, Chief, Balco Bachao Sanyukt Abhiyan Samity, theapex body of the seven striking unions, "The workers are interested in joining duty but the

management is taking a rigid stand". On May 9, 2001, a 25-point agreement was signed

between the union leaders and the management. With this agreement, the long drawn out

battle between the union and the management seemed to have come to its logicalconclusion. Balco employees went back to work ending a 67 day strike.

The trade unions called off the proposed nationwide strike on May 18. In a related

development, the Supreme Court stayed all notices issued by the state government to Balco

management asking it to show cause why the land leased to its plant not be cancelled as itwas situated in a tribal land. The court asked the government to justify its stand incanceling the land allotment to Balco while permitting such allotment to two other private

companies – Daewoo Power and Essar Steel.10

All's (Not) Well That Ends Well The workers were not happy with the agreement and dubbed it as 'a face saving' exercise.

'We could have very easily bargained for a better deal if only we had negotiated earlier. Ourbargaining powers got considerably reduced when the management realized that we were

cracking under pressure' the workers said. The union leaders had to give to the pressure,

which increased when Jogi who had so long vowed to revoke the deal, backed out. This wasfollowed by the Supreme Court order asking the workers to consider two months wages as

advance.The workers felt that all the twenty-five points of theagreement were not exactly in their favor. The

management assured that there would be no

retrenchments, not just for one year, as stated earlier,but till retirement.

They would also continue to enjoy all the existingbenefits that were due to them as public sectoremployees. The wage agreements would be discussed

with the representative unions in three months time

and a new package of wages could then be introduced.

However, the management turned down the worker's

demand to have the agreement counter guaranteed bythe GoI. The management was also free to maketransfers. Many workers felt that 2002 would see mass

transfers of all the 'troublesome' workers whospearheaded the strike.

Trade unions affiliated to the Left Parties expressed

their strong displeasure at the manner in which the

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deal was rushed through. They blamed Jogi for the

workers plight and said that had he kept up hissupport, they would not have ended their strike.

Said Harinath Singh (Singh), General Secretary, AITUC, "Mr. Jogi promised us his full

backing, but ditched us at the eleventh hour. He went back on his words, perhaps due toorders from his party high command. This is highly unethical. The INTUC taking a cue from

Mr. Jogi suddenly developed cold feet and more or less forced the issue." Mr. Jogi'ssuddenly withdrawing support to the striking workers had raised many eyebrows.

Some of the workers did not see it just as political opportunism but a definite indication that

some underhand deal had taken place. "We cannot say for certain about who took money to

clear the disinvestment deal in the first place. But we are certain that Mr. Jogi's hands arenot clean now. A deal has definitely been struck between the Chattisgarh Chief Minister and

Sterlite Industries. Otherwise, there is no reason for him to withdraw his support to thestriking workers overnight," the workers alleged.

Singh said that the fight against the agreement would continue if there was any injustice.

He commented, "The first thing on our agenda right now is to get the Central Governmentto provide a counter guarantee to the agreement that we had signed with the management.Although the new owners have said that there is no question of involving the Central

Government now, we will still try our best." As per the union's demand, GoI should provide

a guarantee of Rs. 25 lakhs per employee if the management went back on its commitmentnot to tamper with their service conditions or retrench them.

The AITUC General Secretary also said, "The management also promised not to transfer anyemployee for one year. But after that, there were free to do as they wanted. This was adangerous move." Commenting on the transfer, he further said, "As regards transfer, the

only place that the workers of Balco at korba can be transferred to is Bidanbagh in West

Bengal. They cannot transfer any worker of Balco to any of their other group companies. If they do, then we won't keep quiet. Lets see if they are vindictive or not."

A clear warning for the Balco Management that ALL'S (NOT) WELL THAT ENDS WELL.

Balco - The Disinvestment Story

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