The classic example of privatisation with overtones of corruption was the Russian experience. The voucher system and private placement of government shares led to business tycoons cornering shares and acquiring control over major undertakings at well below their true value and stripping the assets of the companies at the expense of the people and the country.

In India we have now reached a stage where privatisation is about to take off but we should be careful that we are not on the wrong runway.

Questions have been raised about the valuation of the companies before they are offered to bidders in strategic sales. The Disinvestment Commission while recommending transparent procedures had also said that a reserve price should be available to the government before deciding on accepting the highest bid so that unduly low bids and collusive bids are identified and rejected. Here one should distinguish between valuation of assets and valuation of an enterprise. While the valuation of assets will be more relevant in the case of closure of an enterprise, the valuation of an enterprise would be more comprehensive and relevant in the case of privatisation of a going concern. Valuation of an enterprise takes into account several factors such as the cash and other assets of the company, the condition and value of it assets, the need for additional investments to modernise it, the debt equity structure cost of VRS, the product range of the facilities, existing competition within the country, the domestic andinternational market, the level of import duties and the entry barriers for new units in the same line of manufacture etc. Government should not only have competent financial advisers but also its own consultants to give it second opinion on the advice given by the global financial adviser. These considerations will be relevant in the case of strategic sales where along with a substantial percentage of shares management control is transferred to a private party on the basis of open competitive bids. If there is adequate competition valuation by bidders will take all this into account. Perceptions may differ and that is why different bids are made.

In regard to the blue chip companies, like the oil companies, NTPC, BHEL VSNL MTNL and the financial institutions the Disinvestment Commission had not recommended strategic sale to a single bidder either foreign or private as in the case of other companies. This has not been accepted. A current case in point is VSNL, which has substantial cash reserves and growth potential. The latest proposal is for sale of 25 per cent to a strategic buyer with transfer of management. Similar proposals are being made in the case of other blue chip companies.

The Commission had recommended the sale of shares to the Indian public with the government retaining 26 per cent of the shares in blue chip companies.

These companies will then become non-public sector, non-private sector, publicly held companies, which are professionally managed without the constraints of the public sector and can grow into global companies.

The Commission had recommended the placement of the minority government shares in a National Shareholding Trust, which will be managed by 6 or 7 eminent persons of integrity and experience in management and could include the finance secretary of the government. There is a precedent for this in a similar arrangement in Singapore where the organisation holding government shares in a number of companies is called Temasek. This proposal which was made by the Disinvestment Commission in 1998 has not been accepted though it was fully supported by the top management of the blue chip companies.

The idea of the NST was proposed because merely taking blue chip companies out of the public sector will be fraught with hazards. The minority shareholding of 26 per cent in the hands of politicians and bureaucrats and the rest of the shareholding distributed among the public will technically make it a non public sector company but with effective control in the hands of the minority shareholder-the government. Such a company will be free to operate without any of the checks and balances of public accountability associated with the public sector and can lend itself to charges of corrupt action in whatever the government functionaries do, rightly or wrongly.

With 49 per cent or 26 per cent shareholding in the hands of Ministers and bureaucrats they will have virtual control and the power to do what they want with the assets of the company and its future activities. Parliament will have no role, the CAG; CVC will also be kept out by virtue of the company being technically converted into a non-public sector company. Future disinvestment will also be in the hands of the new management with de facto control with some government functionaries. The appointments of the top management will also not be required to make on PESB recommendations.

If subservient persons are hand-picked with large salaries outside the public sector scales, every contract and every transaction of the company will be subject to approval by the powers that be. The scope for mischief can easily be imagined. Even if there is no corrupt motive in the decisions, allegations can be made.

Apart from this, the de facto government control will make it difficult for the company to raise fresh funds in the market. Even the disinvestment will also not get the required response from the public.

These are the reasons that led to the suggestion of the NST and it is for these reasons that the proposal was supported by the blue chip companies.

This is one more example of how an innocuous proposal for disinvestment can have seeds of corruption in very large enterprises.

Unless government is alive to these pitfalls of privatisation, our own privatisation can go the way of the Russian experience.

It is time that government gave serious consideration to the proposal for distributing shares widely among the public and the employees and entrusting minority shares in blue chip companies to a National Shareholding Trust whose legal feasibility was confirmed by the Disinvestment Commission before making the proposal.