"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: Introduction

In 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 Sterlite Industries Ltd. (SIL), for Rs. 551.5 crores. Balco was a profit 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 the second at Bidhanbag in West Bengal equipped to produce 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 bauxite mining and land lease Balco was granted as a Public Sector Unit (PSU) in case the GoI failed to review the proposal. 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, the Parliament 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. The employees 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 the agreement, the future of Balco did not seem to be very promising.

Balco - A Profile
Balco, incorporated in 1965, was closely associated with the growth of the Indian Aluminium industry. 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 and smelting 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's intermediate range ballistic missile, Agni and surface to surface missile, Prithvi. The GoI held 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 I PRODUCTION FACILITIES Korba Plant Bidhanbag Plant 200,000 tonnes per annum capacity Hot and Cold Rolling Mills (3600 Alumina plant. tonnes capacity). 100,000 tonnes per annum capacity One Extrusion Press (1250 tonnes Smelter. capacity). Three wire rod rolling mills for manufacture of Aluminium redraw wire rods. Three Extrusion Presses (3150 tonnes, 2500 tonnes and 800 tonnes capacity). Hot and Cold Rolling Mills (40,000 tonnes capacity). 274 MW power plant. Foil Plant (600 tonnes capacity).

Conductor Plant.

Stage I: The Tug of War

In mid 2000, leading domestic players like the Aditya Birla group company-Hindalco Ltd, SIL and the global major, Alcoa, expressed their interest to acquire 51% controlling stake in Balco. They had to verify the financial 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, the group visited the Balco plant (Korba) to get a firsthand impression of the plant and its facilities, its operation and the mood of the employees prior to disinvestment. The Balco disinvestment was mired in controversy right from the day it was announced. The employees' union of Balco put up a stiff resistance to the

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 not warrant it, the Government of Madhya Pradesh2 had deputed thousands of policemen in plain clothes and uniform to terrorize the employees and facilitate the IMG Committee members' 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 the disinvestment," 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 outdated technology 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 to sell 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 less dividend to the government was too little for the modernization of the company. According to 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 time announced 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 the disinvestments. 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 was growing, with the union submitting a memorandum to the Prime Minister seeking his intervention. The employees 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 coldrolling projects (Rs 184 crores), has been grossly underestimated. The union also alleged that there were several lapses in the tendering process. As per the existing tendering procedure, bids were to be invited from minimum six parties and the GoI tendering procedure indicated that there should be a minimum of three parties. However, both had not been followed.

In February 2001, the union filed petitions with the Department of Company Affairs (DCA) and the Monopolies 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 price before the start of the disinvestment process, valuation of the company by GoI and nonsettlement of pending dues by many of foreign and domestic parties have not been taken care 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 551.5 crore. 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 the US-based Alcoa.3 Said Arun Shourie (Shourie), Disinvestment Minister, "The bid of Sterlite compares 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 the most 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 VRS package 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 Deepens

The 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 the lack 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 they were 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 even necessary, that an element of secrecy is maintained when the bidding process is on. But once 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 papers till a debate took place in both the houses of the Parliament (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 was nothing wrong with the valuation.

Meanwhile, in another significant development, Chhatisgarh Chief Minister Ajit Jogi (Jogi) accused the GoI 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 disclose any 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 profit of Rs 100-150 crore were being sold for a paltry Rs 551 crore. He warned the state government 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 the Department of Mines and of Disinvestment. At no stage, whatsoever was any official of the Prime 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 had determined. The Evaluation Committee consisting of officials from several ministries and the adviser recommended that this bid be accepted. The Core Group of Secretaries endorsed the recommendation. The Cabinet Committee accepted the recommendation. The entire procedure 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 single person 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 will face the consequences in the court. The moment Jogi names the person, he will be taken to court 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 the amount 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

Meanwhile, the Opposition demanded a Joint Parliamentary Committee (JPC) probe into the Balco deal. The GoI rejected the demand for a JPC probe leading 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 not to 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 Manmohan Singh (Congress I) asked Shourie to reconsider the demand for setting up a small JPC to go into the Balco deal to ensure its transparency and vindicate GoI. However, Shourie dismissed the need for a JPC probe and emphasized that an assessment by the Comptroller and Auditor General (CAG) would be sufficient. The CAG's findings could be taken up for scrutiny 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 crore agreed to by the GoI. Terming Balco's valuation as faulty, the Opposition said, Balco's captive 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 valuation of 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 through the balance sheet method at Rs 305-348 crore." Shourie further said, "Only the government approved 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 value of the assets was placed around Rs 1,072 crore, 51% cent of which would be around Rs 547 crore." On March 1 2001, voting on the controversial Balco deal took place in the Lok Sabha. The Parliament approved the controversial Balco deal, with the opposition-sponsored motion being 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 SIL handed 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 sell any 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 clauses prohibiting 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 60 billion) is being sold for just Rs.551 crore (Rs.5.51 billion), the circumstances speak for themselves." 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 is telling lies. He is a liar. Let him give even a single example when he consulted me, when he contacted me on Balco," Jogi charged in the interview. Demanding a probe by a joint parliamentary committee (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 are involved, it should be probed." Contending that the deal took place 'without taking the people into confidence,' Jogi said his government was ready to purchase the company for the same amount that had been 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 to go on strike, and encouraged them not to let the managers run the plant. On March 3, 2001, the employees launched an indefinite strike. The agitation by the employees brought the operations of the plant to a standstill. Apart from productivity loss, there were apprehensions that the employees would resort to damaging the plant facilities. The GoI moved the Supreme Court to prevent the state government from disrupting the work 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 plant at Korba, so that they do not suffer physical harm of any kind." The Parliament witnessed heated exchanges between Opposition and ruling party with the Opposition questioning the GoI's propriety in moving the Supreme Court without taking the Chattisgarh State into confidence. Countering the Opposition charges, Shourie said the Centre 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 said the Disinvestment Secretary had written to the Chattisgarh Chief Secretary about the disturbing 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 officials to 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 Balco divestment. 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, the indefinite 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 crore and 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 Balco employees 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 adequate security to workers and management of the Balco plant at korba as per a Supreme Court directive and suggested a dialogue between the workers and management to resolve the ongoing crisis. The management also appealed to the workers to rejoin work to save the smelter. The management threatened a lockout unless the employees returned to work. Said a 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 552 crore, which were sold to SIL at Rs 551.5 crore. It said, the deal was complete and couldn't be reopened as the GoI had already transferred its 51% stake to SIL on March 2, the day after Parliament approved the deal. In April 2001, all central trade unions including Bharatiya 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 return to 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 marathon meeting 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, the apex 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 logical conclusion. 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 it was situated in a tribal land. The court asked the government to justify its stand in canceling 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. Our bargaining 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 was followed 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 the agreement 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 existing benefits that were due to them as public sector employees. 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 by the GoI. The management was also free to make transfers. Many workers felt that 2002 would see mass transfers of all the 'troublesome' workers who spearheaded the strike. Trade unions affiliated to the Left Parties expressed their strong displeasure at the manner in which the

deal was rushed through. They blamed Jogi for the workers plight and said that had he kept up his support, 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 to orders 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's suddenly 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 are not 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 the striking 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 Government to 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 commitment not to tamper with their service conditions or retrench them. The AITUC General Secretary also said, "The management also promised not to transfer any employee for one year. But after that, there were free to do as they wanted. This was a dangerous 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.