CAG slams Centaur sale

Reserve price, bidding process come in for criticism.

In what could spell trouble for former Disinvestment Minister Arun Shourie, the Comptroller and Auditor-General of India (CAG) today said his ministry had deviated from practice while disinvesting the Airport Centaur and Juhu Centaur hotels of Air-India.

The observation came two days after Finance Minister P Chidambaram said in the Rajya Sabha that Shourie had taken an "active interest" in processing the transaction of the Juhu Centaur divestment and the government would consider an inquiry after receiving the CAG report on the sale. 

Corporates on a roll
Quarter ended (1000 firms)
Rs Crore	4-Mar	5-Mar	% Chng
Sales	115,552.82	138,038.81	19.46
Other income	3,224.99	3,844.26	19.2
Operating profit	22,053.76	27,950.40	26.74
Interest	3,358.62	3,427.64	2.06
Gross profit	18,695.14	24,522.76	31.17
Depreciation	5,069.52	5,565.96	9.79
Tax	2,721.79	3,583.58	31.66
Net profit	9,974.52	14,830.50	48.68
OPM (%)	19.09	20.25	-
GPM (%)	16.18	17.77	-
NPM (%)	8.63	10.74	-

"Even though the report's observations deal with technicalities and procedures, and it does not allege impropriety, I reiterate my offer to face any inquiry that the prime minister or finance minister may deem fit," Shourie said in a statement.

In a report tabled in Parliament, the CAG said there were inconsistencies in arriving at the reserve price for Airport Centaur, while the ministry relaxed various norms during the sale of Juhu Centaur to the Ajit Baburao Kerkar-promoted Tulip Star Hotels Ltd.

"Due to inadequate initial scrutiny of the financial strength of the bidder, the ministry had to relax several conditions and make interventions at a later stage to ensure conclusion of the sale, which cannot be viewed as a good practice," the report said.

It added that relaxations and interventions by the ministry to facilitate the sale "indicated inadequate efforts to mitigate the risk of transaction in a limited competition scenario".

The CAG said the ministry did not adequately scrutinise the financial strength of Tulip. It gave two extensions to Tulip for paying the bid amount of Rs 153 crore without charging it any interest or encashing the bank guarantee it had furnished.

"The fact of the matter is that the bidder paid the entire amount and the government got every paisa of the bid price of Rs 153 crore.... In a surprising observation, the CAG says that interest was not charged for late payment. Financial closures usually take two to six months.

"In this case the hotel was not handed over to the bidder till he paid the required amount and all the transaction documents were completed. Where was the question of charging him interest when he had not been given possession of the hotel?" Shourie said.

The report also noted that the ministry intervened to facilitate the closure of the deal. According to the report, it was at the ministry's insistence that one member of the bank consortium funding the acquisition dropped its insistence on the deal being signed before the disbursals were made. The consortium became the lead banker and subsequently replaced the escrow agent.

On its part, the ministry said the bid of Rs 153 crore put in by Tulip was substantially above the reserve price of Rs 101.6 crore. As the tourism sector was badly impacted after 9/11 and the hotel was incurring losses, it was thought prudent to complete the transaction. The bank guarantee, it added, was not invoked as Tulip had given the money before the revised deadline.

The CAG has also said some assumptions made by the global advisers to the deal resulted in a lower valuation of the two hotels. It said the global adviser for the sale had ignored the surcharge on income tax and assumed a flat rate of corporate tax resulting in a higher cost of debt and consequently lower valuation. In contrast, the 2 per cent surcharge was factored in the disinvestment of government equity in companies like Balco, IBP Ltd and CMC.

The ministry responded to the charge by saying that while the basic corporate tax had remained unchanged at 35 per cent, the surcharge had changed and was, therefore, deliberately ignored.

The report also pointed out that the global adviser's assumption of a risk-free rate (the yield to maturity on government securities based on current trading volumes over a long tenor) of 25 years, as against 10 years for other public sector companies, raised the cost of equity and suppressed valuation.

The ministry was of the opinion that a 25-year duration was taken because equity has indefinite maturity. It also said assumptions and methodology could differ from one expert to the other.

The CAG also said in the second round of bidding for Airport Centaur, the global adviser had increased the base value from Rs 76.2 crore to Rs 92 crore after the turnover levy payable by the hotel to the Airports Authority of India was cut from 6 per cent to 2 per cent. Still, the evaluation committee for the disinvesment set the reserve price at Rs 78.3 crore, which was only marginally above the earlier reserve price of Rs 76.2 crore.

In its reply, the ministry said the global adviser had overestimated the valuation of the hotel in view of the increased supply of hotel rooms in Mumbai and the depressed market conditions post 9/11.

The report said the CAG audit team could not check the adequacy of competition generated during the process of disinvestment of the two hotels as the government's efforts in this direction were not evident from the records.

"Log of contacts, communication with the bidders and reasons for the withdrawal of 16 parties in the case of Juhu Centaur and 13 parties in the case of Airport Centaur without carrying out due diligence were not documented," the report said.

"The CAG's report dissects technicalities. The recommendations which flow from it are impractical and will further impede the reform process," Shourie said.

CAG Says

Ministry of disinvestment sold hotels to single bidders

Insufficient scrutiny of Tulip's finances

Government did not charge interest for delayed payment

Government intervened with banks to finance Tulip's acquisition of Juhu Centaur

Incorrect assumptions led to lower valuations

Arun Shourie Replies

The business environment for the two hotels was deteriorating, rebidding would have taken time, CCD had decided to go ahead with one bidder

Government got every paisa of the Rs 153 crore bid by Tulip

Interest could not be charged as the property had not been handed over to the bidder

Banks were spoken to only to assess the soundness of Tulip's offer. Eight banks independently assessed the creditworthiness of the bidder

Different experts make different assumptions