labels: tata group, tata teleservices, vsnl
A bitter honeymoon news
Uday Chatterjee
01 June 2002
Mumbai: Set the clock back to 13 February 2002. The day the Tatas and the Indian government signed a historic deal, whereby the Tatas entered the board of the public sector company Videsh Sanchar Nigam Ltd (VSNL).

This disinvestment process caused a lot of euphoria, with expectations flying high at all quarters. The future of VSNL never looked so bright. The event was so frolicsome that while handing over the management control of VSNL, the government said VSNL was its 'daughter' and the Tata group its new 'son-in-law.' The 'father-in-law' even wished her daughter a long, happy and prosperous married life.

Less than three months later, on 27 May 2002, it looks like the honeymoon is over. The discontentment started when the VSNL board decided to invest up to Rs 1,200 crore in the share capital of Tata Teleservices Ltd, the basic telephony services company of the Tata group.

''The strategic investment will be in tune with the company's initiative to reach out to the end-customers,'' said a news release from VSNL, in which the Tata group will have a 45-per cent post-open offer for an additional 20 per cent stake in VSNL, following its acquisition of 25 per cent stake from the government.

''Basically this would mean forward integration for VSNL, which does not own customers. It is the access provider which owns the customer to whom VSNL will now have access,'' said a Tata group spokesperson.

At the time of the Tata group's acquisition of 25 per cent stake in VSNL, the group had said VSNL would be ''a key component of the Tata group's holistic telecom strategy.'' It said it would be the ideal opportunity for the Tata group to seamlessly integrate its basic and cellular services with VSNL's presence in international long-distance telephony and Internet services.

Union Communications Minister Pramod Mahajan, who has raised strong objections to the VSNL board's decision to transfer Rs 1,200 crore to Tata Teleservices, has sought to issue show-cause notices to the two government nominees on the VSNL board. Mahajan has pointed out that permission from the central government should have been taken before any such decision was taken. The two government nominees may be asked to quit the VSNL board.

''When VSNL was divested in favour of the Tatas no such option was ever anticipated. The Tatas have no right to transfer resources from VSNL to any of their group companies without seeking permission from the department of telecommunications. This is totally unwarranted and strong action is being contemplated by Mahajan,'' say official sources.

''Neither VSNL nor the Tata group has received any formal communication from the government protesting the VSNL board's decision on 28 May to invest up to Rs 1,200 crore in Tata TeleServices,'' says Tata Industries managing director Kishore Chaukar. And a VSNL statement says the agenda for the board meeting containing this item was circulated one week in advance.

The board meeting was attended by both the independent directors and one government director (the other being out of India). The board deliberated on the agenda after a presentation made by the director (operations) of VSNL, said the statement.

On 28 May, there were reports that the telecommunications ministry had taken exception to the decision and that it was questioning the role of the government-appointees on the board. ''We want to remove the confusion. We feel there has been some miscommunication,'' says VSNL managing director S K Gupta.

''The investment is a matter for consideration of the board and the decision is under the provision of both the Companies' Act and the shareholders' agreement and is not a shareholder reserved matter,'' says Chaukar. ''This is not a sudden outgo of funds. It is an investment that will be made over three or four years for a share of 20 to 26 per cent in the company.''

The new VSNL management said the investment decision was in the interests of the very viability and survival of the company and did not constitute 'asset-stripping.' Says VSNL director (operations) N Srinath: ''The company would soon be up against competition such as the Bhartis, Reliance, Mahanagar Telephone Nigam Ltd (MTNL) and Bharat Sanchar Nigam Ltd (BSNL), which are integrated players with presence in access provision (basic or cellular), national long-distance and international long-distance (ILD) services. VSNL, with 87 per cent of its revenues coming from ILD services, which provided no direct customers, will be in a vulnerable position.''

''The decision to be an access provider is nothing new and was thought of by VSNL even before disinvestment,'' says Gupta. ''VSNL had applied for basic licences for six telecom circles, but was refused permission on the grounds that the same promoter (the government, which also owns BSNL and MTNL) could not be present in the same area providing the same service.''

This applies to any shareholder with even a 10-per cent stake in a company and still applies to VSNL in which the government has a 26-per cent stake. ''Therefore, the best option is a partnership with an existing company whose business interest does not conflict with VSNL's,'' Gupta says.

''Tata TeleServices, though making losses, was no different from any other telecom company that makes losses for the first five years or so on account of heavy capital expenditure,'' says Chaukar.

Tata TeleServices' project cost for the next four years for its six licensed circles is around Rs 8,247 crore, with equity amounting to Rs 4,325 crore. Of this equity, the Tata group would be contributing Rs 2,552 crore, VSNL Rs 1,200 crore with Rs 573 crore coming from non-Tata sources. The projection is that the company will have three to seven million customers in the next seven years.

The story, it seems, may not end here. And talks of a long court battle to settle the issue are doing the rounds right now.

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A bitter honeymoon