Sunil Jain: The great gambler

RATIONAL EXPECTATIONS

Videsh Sanchar Nigam Limited's (VSNL) civil suit in the Bombay High Court asking the government to pay it Rs 3,475 crore (till date) as damages for cutting short its monopoly over international telephony in the country by two years makes interesting reading because it exposes the poor job done by the dramatis personae in the privatisation process, and their vacillation on critical issues, which led to this massive suit.

It isn't easy to make up one's mind about Ratan Tata because the suit throws up different images of the Tata chief, who paid Rs 1,439 crore for VSNL.

Since by mid-2000, two years before the Tatas even bid for VSNL, everyone, including the group's brass on telecom, knew the monopoly was going to be cut short, it never was clear as to why Tata bid so much.

More so, when rivals like Bharti and Reliance were able to start up the same international long-distance business by applying for new licences for just Rs 25 crore and investing around Rs 100 crore more to set up the basic gateways required for the business, and are both making good money out of the business.

A possible explanation the suit throws up is that the Tatas felt the government had committed to provide VSNL a compensation package and this made it worth a lot more than most people imagined.

In which case, Tata's a brave man for having gambled with Rs 1,439 crore of shareholders' money to buy up a company on the basis of a possible settlement in the years to come, more so given just how long damage suits take to get decided.

All of this, by the way, is neatly documented in the Tata-controlled VSNL's suit. In February 1994, the suit tells you, when the government first wanted to raise money in the GDR market, VSNL was assured it would have a ten-year monopoly over international telephony and this was re-confirmed on various occasions over the years.

On July 28, 2000, however, the government decided it was going to terminate the monopoly two years ahead of schedule, and offered various sops in return""these included a licence for domestic long-distance telephony (the licence fee of which would be reimbursed) and no bank guarantee as long as the firm was a PSU.

VSNL, however, didn't accept this and said it was appointing a merchant banker to assess the potential loss.

There was a spate of correspondence on the matter, which was eventually passed by an extraordinary general meeting of VSNL in May 2001, subject to a proviso that "if a detailed review in future establishes the need for additional compensation, the Government shall consider the same."

On January 29, 2002, a few days before the Tatas put in their financial bid, the government sent a letter to VSNL on the "full and final settlements of claim" and refused to consider any additional compensation for terminating the monopoly two years in advance.

Now, the VSNL suit may be correct in arguing this was bad in both spirit and law, but the Tatas knew before they bid that the government was not planning to give VSNL anything more""nor does the suit say the Tatas were not aware of the letter.

In fact, since VSNL's bankers said the company would lose Rs 4,000 crore due to advancing the monopoly termination, it stands to reason the Tatas would have had to pay that much more for VSNL if the monopoly hadn't been terminated.

In other words, it's difficult to see how the Tatas are the aggrieved party in the matter. If anyone, it's the international investors who bought VSNL's GDRs that have a claim, but they don't appear to have filed for any damages.

Which is why, of course, the suit hasn't been filed by the Tatas but has been filed by VSNL, the corporate entity controlled by the Tatas. This is where the government's incompetence comes in.

First, it allowed VSNL's directors to constantly question its actions and even appoint bankers to evaluate the loss by the moves. Then, it kept postponing serious discussion on the matter with a we-will-consider kind of clause each time.

And after VSNL was sold to the Tatas, the government, which still owned 26 per cent of it, allowed VSNL to write off nearly Rs 1,000 crore from its share premium account, and keep all the Rs 1,500 crore, got from selling its stake in companies like Intelsat and Inmarsat""yet none of this was mentioned when the Tatas talked of a compensation package.

Indeed, the government directors on VSNL's board even kept quiet when, for two years, VSNL's Director's Reports said the government's compensation package was inadequate.

The VSNL suit, in fact, cites this in support of its case. And since VSNL couldn't have filed a suit without the board clearing it, the government directors must have cleared even this action against the government!

But why blame the poor directors alone? In February 2004, Jaswant Singh, then finance minister, wrote back to Tata on the issue of compensation, saying he'd discussed the matter with Arun Shourie""Shourie sold VSNL as disinvestment minister and was telecom minister from 2003 onwards, when VSNL's directors, who reported to him, were writing up Director's Reports saying he had short-changed VSNL as disinvestment minister.

Singh told Tata that Shourie shared his view and the matter should be settled through arbitration. Clearly Shourie had some serious doubts about the moves he himself had initiated.

Postscript: Who comes out worse in the entire episode, Tata's colleagues who allowed him to waste Rs 1,439 crore when competitors managed to get into the same business at a fraction of this, or the telecom/disinvestment ministry, which mishandled affairs? It's a pretty close call.