Govt puts rider on inter-corp PSU funding

NEW DELHI: Still smarting under the VSNL-Tata Teleservices controversy over Rs 1,200 crore inter-corporate investment, the divestment ministry has decided that strategic partners in privatised PSUs will have to seek government approval for investments in excess of Rs 50 lakh.
This provision has been incorporated in the draft shareholders agreement circulated to the prospective bidders for 51% stake in Engineers India.
The provision is also likely to be included in transaction documents for all future privatisation sell-offs. The transaction documents for the deals concluded so far had not insisted on affirmative voting for inter-corporate investments on the grounds that it was covered by section 372A of the Companies Act, 1956.
A section of the merchant banking community had been in favour of the affirmative voting clause for inter-corporate investment proposals, following the breakout of the VSNL-Tata Teleservices controversy.
According to the draft shareholders agreement currently under circulation, affirmative voting by government will be required for some 15 matters including asset stripping, transfer of rights or interest in affiliates, altering the memorandum of association and articles of association, and sale or lease of 20% of the fixed assets. Further amendments may be incorporated before it is finally cleared by the core group of secretaries on disinvestment and Cabinet Committee on Disinvestment.
The draft shareholders agreement allows the government to exercise “put� option in the second and third year from the closing date of the transaction, where it can offer its residual holding to the strategic partner at a fair value determined by a valuer.
The strategic buyer will have the “call� option in the fourth and fifth year. In addition, the government can exercise “offer for sale� of its residual holding after the fifth year, if the put and call options are not executed by either of the party.
The draft agreement further states that reconstituted board of the company will have 11 directors — six nominees of the strategic partner and five nominees of the government. The government will continue to have five directors as long as it holds 26% equity in the company.
Other conditions of the agreement allow the new management to increase the capital base of the company by giving the shareholders a “funding notice�. The shareholders would be required to contribute their share within 90 days of the notice. If the government’s equity share falls below 26% by virtue of the increase in capital base, that is, if the government decides against contributing its share, the government can seek to exit the company by exercising a put option.