Tatas pay for 10-year delay in demerging VSNL land
Though Tata Communications won’t get a penny out of the R6,500-7,500 crore that will be generated from the sale of the erstwhile VSNL’s land now that the Cabinet has cleared the proposal to de-merge the land, it was for a good reason that its shares rose 5.9% on Friday. Thanks to a scandalous 10 years in which the government refused to clear the land demerger, Tata Communications couldn’t raise capital and was forced to fund its entire capex through either debt or internal cash accruals. With around R10,000 crore of extra debt since the Tatas took over the telco in 2002, Tata Communications has a debt-to-EBITDA ratio of over 3, making it uncomfortably leveraged.
In 2002, when the Tatas bought 25% of VSNL from the government for R1,439 crore, the government said the surplus land wouldn’t be part of the deal. So it was decided 773 acres of land, including 70 acres in the posh Greater Kailash area in Delhi, would be spun off into a separate company—the eventual beneficiaries of the land would be the holders of VSNL’s equity prior to the disinvestment process. So, the government was to get 51% of the proceeds of the land, 20% would go to VSNL shareholders who sold their equity (20%) in the open offer the Tatas made after they bought the government’s 25% stake; the rest of the proceeds would be divided among the remaining shareholders. Two problems arose in this transaction. First, who was to pay the stamp duty when the land was transferred—the Tatas rightly said they wouldn’t pay the amount. The second related to the transfer of land to the SPV in a two-step procedure. In the initial step, the Tatas would hold 50% of the equity in the SPV (in keeping with their existing shareholding in VSNL). In the second step, the Tatas would transfer this equity to the government and VSNL’s shareholders at the time of disinvestment in 2002. The Tatas wanted a confirmation that were capital gains to be paid if the land was revalued, the government would either waive this or pay it.
Pretty straightforward, you’d think, but not for the government even in its pre-policy paralysis days. So when the Tatas wanted to raise funds, the government didn’t allow any dilution in its equity holdings in VSNL, possibly in the belief that this would reduce its profits from the land—or possibly it was just lethargy. Neither did the government accept the Tata proposal that in case the government wasn’t able to give it the necessary tax exemption, the Tatas would pay a fair market value for the land—which the government could distribute to VSNL’s then shareholders. While the government stands to gain a windfall profit of R3,000-4,000 crore when VSNL’s land is sold, all the Tatas have got is a chance to lower their interest burden in a company highly-leveraged through no fault of theirs.