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Tata Teleservices investment: What's in it for VSNL shareholders?

S. Vaidya Nathan

A VERITABLE storm has been kicked up by the decision of Videsh Sanchar Nigam Ltd — now under the control and management of the Tata group — to invest Rs 1,200 crore in Tata Teleservices. Much of the focus has been on the fact that a private group is pulling out from a recently privatised PSU a large sum of money.

The criticism has been focussed mainly on how this may not be in line with the spirit of the shareholders agreement between the Tatas and VSNL. Per se, there appears to be nothing amiss about the investment plan. And there appears no case for the Government to step in and question this move.

This VSNL investment plan may make more sense than the manner in which the Government forced oil PSUs two years back to pick up stakes in each other. In that instance, it could not be argued that the investments represented an optimal use of funds. It was done just to ensure that the Government had receipts to show by way of disinvestments.

The VSNL case can neither be construed as a case of asset stripping. Cash is an `asset' but here, the Tatas are not doing any asset stripping of the kind not allowed in the shareholders agreement. Purely from a business perspective, VSNL has to broaden its profile. What is more, it should be able to meet the investment calls comfortably from the cash flows from its operations over three-four years.

Having invested Rs 2,600 crore to buy a 26 per cent stake from the Government and make an open offer for another 20 per cent, the Tatas cannot be expected to sit back and run VSNL as it used to be. Clearly, the decision to acquire VSNL was part of an overall gameplan of the Tata group.

The group has a presence in virtually every segment of the industry and is eyeing growth opportunities. Buying VSNL has to be seen from this perspective. It would also be meaningless for the group to let VSNL acquire a customer interface on its own. This would have been unnecessary, given that a couple of group concerns are already into this business. Tata Teleservices is one of them.

In big business groups, such large-scale investments in group companies are not uncommon. For instance, ITC has invested big sums of money (close to Rs 500 crore) in bailing out ITC Bhadrachalam. Yet another prominent instance is the massive investments by Reliance Industries in Reliance Petroleum.

These are just two of the more notable instances of such inter-corporate investment. Just because VSNL was until recently a PSU, its move is not different from corporate practices.

In cases of such investments however, the one thing lacking is the degree of transparency. Not all such investments pay off — in fact, most turn out to be problematic and value-depleting for shareholders.

Rarely has such deployment of cash paid off for such shareholders. In most cases, returning the funds to shareholders may well have been a better move. But Indian business groups with a range of businesses in need of cash support and companies have generally been loath to returning surplus cash.

This is one reason why even when a company is flush with funds from sale of assets, it rarely returns them to shareholders. The general trend is to deploy it back in the company itself or in some sister concern. Usually, such cash deployment does not earn the returns equity investors expect.

They are also twice removed from the earnings stream of the company in which funds are invested. Only if the dividends paid by the company account for a large proportion of its earnings, would the investment be of value to the investor company. This seldom happens. Given the manner in which business groups desubsidarise a company or take it private, the risks are, indeed, high for shareholders of the investor company.

In the instant case too, this may turn out to be the problem. The Tatas have not outlined how VSNL would fit into its overall game plan in the telecom sector. The shareholders of VSNL — the company now making sizeable profits and generating good cash flows — have more at stake than other group firms in telecom.

If VSNL is going to provide investment support to the group's efforts in telecom, its shareholders need to be presented with a realistic idea of the overall plans, the payoffs, the risks, the degree to which returns may be commensurate with equity investments and the possibility of a merger, among others.

Given the nascent private sector presence in the telecom sector and the regulatory maze, there would be difficulties and uncertainties in laying out such details. But the shareholders are at least entitled to know the management's current thinking and expectations.

It is the absence of information that is worrisome about VSNL's investment plans, not its plan to invest. This is one grey area the Tatas can and explain for the benefit of VSNL shareholders.

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