The Hindu Business Line : VSNL-Tata Teleservices issue -- Why Govt should keep out of business

The Government has often invested borrowed money in enterprises unconnected with governance. For instance, investing in bread-making enterprises, hotels or cycle-making companies cannot be justified on any business principles. On what moral ground, therefore, can the Government object to VSNL dipping into its reserves to invest in a telephone company?

THE IT and Communications Minister, Mr Pramod Mahajan, faulted VSNL's decision to invest, from its considerable reserves, Rs1,200 crore in the basic telephone company, Tata Teleservices, belonging to the Tata group. There have been several comments from interested as well as under-informed quarters. They raise a number of issues.

When a PSU is sold to private companies with management control, it is immoral and illegitimate for the seller to want to exercise control thereafter. It is somewhat like a mother and father exercising control over a daughter given away in marriage.

If there is illegal and cruel treatment of the person or thing given away, intervention is not objectionable, but it should be within the general framework of morality and legality.

VSNL had huge reserves, all of which were not legitimately earned as far as the consumers are concerned because international calls were priced far above costs.

The monopoly used that surplus to accumulate reserves. Impressive amounts from the reserves were appropriated by the owner — the Government, which took two huge dividends, of 500 per cent and 750 per cent, in the year before disinvestment. Was this not stripping VSNL before it was sold?

The money `ripped off' VSNL (like the 1250 per cent dividend) did not even go as much-needed investments into telecom or IT, for DoT or MTNL, but went to partly fill the deep well of deficits, made deeper by such harmful expenses as subsidies to Haj pilgrims; feeding some sections to nurture the illiterate voters; financial assistance to NGOs for adoption-trade in children; grants to non-productive PSUs to pay idle workers; hiked dearness allowances, and so on.

Unlike this profligacy, the latest amount drawn from VSNL's reserves is going into the telecom sector — a welcome outcome of disinvestment. Some of VSNL's real estate, also built from the monopoly's profits — were also kept out of the sale of VSNL. Thus, the Government had already stripped much of VSNL's wealth.

Whatever amount was paid by the Tatas to acquire the 25 per cent stake and management surely took into consideration the reserves the company still held.

Had there been a clause in the sale of the PSU that the reserves could be utilised only with the IT Minister's, or the Cabinet's, permission, the price offered by the Tatas would have been much less. Reserves are not meant for hoarding.

They are meant for investment, either in the same line or related business and, sometimes, even in unrelated businesses.

The Government has set many examples of investing borrowed monies in enterprises that are absolutely unconnected with governance.

For example, investments in bread-making enterprises, hotels or cycle-making companies cannot be justified on any business principles. They are unrelated to governance of the country. On what moral ground can such a government object to the VSNL investing from out of its reserves, not in cycles or hotels or bread-making, but in a telephone company — in this case, Tata Teleservices?

It is, of course, quite legitimate for every shareholder to expect and want the VSNL to make a due diligence study of what it should pay for the acquisition of the TTL equity.

Every shareholder, including the government, may insist upon this.

Much before disinvestment, VSNL sought licences to enter domestic long-distance and cellular mobile telephony in preparation for the loss of its monopoly. The Government denied it these licences on the ground that it did not want its own companies — VSNL, MTNL and BSNL — to compete with one another. Now that VSNL is no longer the Government's baby, it should be allowed to make its own business decisions.

VSNL says it has no direct relations with any person who makes international calls. This is not new. It has been so for more than 100 years. VSNL was clearly told that it was an agent of the government's DoT.

It was to be handed over the international traffic at its gateways by the domestic operator — the DoT. The DoT set the prices for international calls and collected all the money. VSNL was to estimate its costs for taking the India-originating traffic to international destinations.

The DoT allowed only those costs, plus some surplus to be used for investment and payment of dividends.

Similarly, for the incoming traffic also, VSNL was allowed to retain a certain amount of the foreign currency payments it received for every minute of incoming, and make over the rest to the DoT. The DoT said that as it was delivering the incoming international calls over the domestic network to the called customers, it had the right to decide how much it wanted out of what the VSNL was getting from foreign carriers, bringing the bound traffic to its gateways.

The DoT billed customers for outgoing international calls, retained the money and bore the risk of default on payments. VSNL says that by investing in TTL it will, among other things, be able to establish direct relations with the TTL subscribers.

This is only a wish. Every customer, whether of BSNL or MTNL or the various basic and cellular telephone companies, shall have the right to choose from any of the several competing national and international long-distance carriers.

Therefore, theoretically, no telephone company with a domestic licence, fixed or cellular of limited mobility, can dictate to its customer who should be his national or international carrier.

In fact, not only carrier-selection but even call-by-call selection can also be exercised by those who make national or international long-distance calls. Chips have been available for quite some time for incorporation in the telephone instrument itself, to store information as to the rates for different destinations at different times, for domestic long-distance as well as international calls.

Therefore, when a customer makes a call, a chip in the telephone instrument can look up which carrier is offering the cheapest rate for this particular call at that time, and route the call to that carrier.

Only, in such a case, the customer will have to get an authorisation from all the carriers among whom he wants to distribute his calls. Some people are saying that VSNL's decision to invest in TTL is wrong because it is a loss-making company.

This charge is amazing. Not a single private telephone company in India is making profits at present. All are running at a loss.

This loss was ensured by the licensor, DoT, which first imposed on the p-telcos hefty licence fees payable upfront and, later, moderated into revenue shares, entry fees and so on.

Besides, the interconnection charges imposed by the DoT/BSNL are also command- and not cost-related.

When the telecoms were demonopolised, both the government and private companies knew that for 5-10 years there is no likelihood of any private telephone company making profits. What is the point now in accusing VSNL of investing in a company that is not yet making profits?

It must be sending a signal to both domestic and foreign investors and telephone companies not to invest in Indian telecom companies until they make profits! This, surely, is not in the nation's interest.

Investment from every quarter, in any telephone company, is the need of the hour. Surpluses are meant for investment and not to put in banks.

If the Tata-held VSNL decides that the Tata-owned and managed TTL is not worthy of investment, it is morally wrong for it to seek any further investment from non-VSNL sources into TTL. It appears that the Tatas are strongly optimistic that both TTL and VSNL are sound companies and, hence, this investment.

Moreover, if VSNL is deprived of investible amounts that it needs for its business, the VSNL decision can be faulted. This is not the position. There are still some reserves left, even after the Rs 1,200-crore investment in TTL and, for another two to three years at least, it will continue to be the dominant international carrier. It will have sufficient surpluses for investment in IP/VOIP international gateways. Further, the optical fibre based submarine bandwidth costs are continuously falling and, therefore, the investment required to acquire international bandwidth will not be a capital-guzzler.

This episode shows how dangerous and hazardous it is to buy PSUs unless politicians are insulated from interference in the privatised PSUs. The country is painfully aware of the furore over the Balco disinvestment.

To conclude, one can only pray that the government's involvement in business becomes less and less, and all business decisions are left to businessmen, with government putting in place professional and talented regulators.

The talk of the government having a golden share in the PSUs to be disinvested will only keep the politicians in the business of even privatised companies.

(The author is Information Technology Advisor to the Government of Andhra Pradesh.)

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