Strategic divestment: Valuation of companies caught in the crosshairs

Forces govt rethink on NINL valuation, delaying sale

The Department of Commerce has flagged concerns over the valuation of companies under strategic divestment, citing the case of Neelachal Ispat Nigam (NINL). This has led to the government going back to the table on the method of valuing a public sector enterprise.

The commerce department has objected to the enterprise value methodology used by the finance ministry’s Department of Investment and Public Asset Management (DIPAM) for valuing NINL for its strategic divest­ment along the lines of Air India. The ministry had signposted this, saying it is not the “generally adopted” appr­oach followed by the government for divestment that involves sale of equity where debt is settled by the successful bidder. It also said that the standard approach followed by the government involves maximising equity value. Using the enterprise value approach would be moving away from this intent.

The government is looking to sell 93.71 per cent stake in NINL held by central and state public sector undertakings (PSUs). The contention of the commerce department — the administrative ministry of MMTC that holds majority stake in NINL — was that the proposed enterprise value approach may be “inappropriate” for NINL and could encourage low bids covering only a part of debt, leading to a suboptimal outcome. The commerce department has said that the equity value methodology would have led to structuring of bids by settling all debt and offering bids for equity as the company is an attractive asset, according to documents reviewed by Business Standard.

Enterprise value is the combined value of debt and equity. Equity value is enterprise value minus book value of debt of a company. The commerce dep­art­ment has also suggested making successful bidders of NINL repay promoters’ debt and carry forward loans of secured lenders. It has also pitched for allowing invocation of insolvency and bankruptcy proceedings in case the new buyer defaults on debt repayment.

However, according to DIPAM, this will result in a complex bidding structure, and the commencement of Insolv­ency and Bankruptcy Code proceedings by financial and operational creditors. Besides, this is against the bidding structure adopted by DIPAM, it said. DIPAM said an inter-ministerial group (IMG) — chaired by DIPAM secretary and co-chaired by the secretary of the administrative department — has taken the unanimous decision to adopt enterprise value methodology based on the advice of the transaction advisor.

DIPAM has stated that the structure of transaction is customised to derive the best value of a company and ensure successful completion of the sale process. Due to high debt of both Air India and NINL, the bidding criteria has been recommended to be based on the enterprise value rather than equity value. 

The issue has led to an intervention by the Cabinet secretary, and the core group of secretaries on divestment chaired by him has asked IMG to resubmit the proposal after concerns were raised by the Department of Commerce. This has led to a delay in the sale of NINL.