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BALCO - THE DISINVESTMENT STORY

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BALCO-A Profile

continued from Page 1

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) was constituted to oversee the disinvestment process. In late 2000, the group visited the Balco plant (Korba) to get a first-hand 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 Pradesh 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 The GoI further said that Balco was under threat as the company was running on outdated technology and was making profits only because aluminium prices in international market were ruling high.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.

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 cold-rolling 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 non-settlement 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. 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. "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

STAGE III: THE DEBATE

STAGE IV: POST SELL OUT DRAMA

ALL'S (NOT) WELL THAT ENDS WELL

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This case study is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. This case was compiled from published sources.


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