Mumbai, May 26
Andhra Pradesh Chief Minister YS Jagan Mohan Reddy, who told Prime Minister Narendra Modi to desist from privatising Visakhapatnam Steel Plant, has been caught on the wrong foot on a disinvestment deal in his own State.
On 4 May, the AP Cabinet, led by Jagan, backed a proposal from Adani Ports and Special Economic Zone Ltd (APSEZ) to buy the 10.4 per cent stake held by the State in Gangavaram Port Ltd (GPL) and to allow merger of GPL with APSEZ.
APSEZ’s move came after it acquired 31.5 per cent stake from Windy Lakeside Investment Limited (an affiliate of private equity firm Warburg Pincus LLC) followed by the purchase of the 58.1 per cent stake held by DVS Raju and family, the promoters of Gangavaram Port, both for ₹120 per share.
Resolution passed
On 21 May, the AP Assembly even passed a resolution opposing the Centre’s decision on strategic disinvestment of 100 per cent stake in Visakhapatnam Steel Plant, seen as a symbol of Andhra pride, and urged the Centre to drop the plan.
The proposal submitted by APSEZ involves buying the AP government’s stake at ₹120 a share, translating into a consideration of ₹645.10 crore or receive shares in APSEZ worth ₹645.10 crore as a result of the proposed merger between GPL and APSEZ.
Gangavaram port: Adani Ports set to buy 58.1% stake from promoters for over ₹3,600 crore
APSEZ’s proposal to buy the stake at ₹120 a share (the price at which it acquired the stakes from Windy and DVS Raju) cannot be an “acceptable valuation” for the State’s shares, said sources.
The AP Government took the 10.4 per cent stake, not by putting cash but in lieu of the 1,800 acres of land that was acquired for the port in 2003, which at the time was valued at ₹54 crore.
Instead of giving the land on lease for the port project, it was transferred to the port developer “as government’s investment towards 10.4 per cent equity in the GPL”, according to a government order.
Value of land
In today’s market, the value of this land is more than ₹3,000 crore. Thus, the value of the stake will be much higher than the ₹120 per share that APSEZ paid the other two shareholders.
The absence of an AP government policy on disinvestment, particularly in profit-making companies, cast doubts over the Cabinet’s decision to sell stake in Gangavaram port.
The Cabinet approval for APSEZ proposal and the subsequent 25 May government order also raises a couple of key questions.
After coming to power in 2019, Jagan put in place a reverse tendering process for public procurement of over ₹100 crore, which has been lauded for its cost-saving benefits. The reverse tendering will be processed through a judicial mechanism, for which a retired High Court Judge has been appointed.
Reverse tendering
Under this mechanism, after the bids are received, the process will again be put through a reverse tendering for which a minimum of two bids in required in the initial round.
AP govt gives nod for Gangavaram Port’s change of ownership
The AP Cabinet accepted the recommendations of SBI Capital Markets Ltd that was hired by A P Maritime Board (APMB) to evaluate the proposal of APSEZ.
SBI Caps recommended that “the government of AP should go in for disinvestment as per the guidelines of disinvestment policy of GoI (Central government) for a better price discovery and negotiations”, the May 25 order revealed.
“SBI Caps has made it clear that the disinvestment by way of direct sale is the best option available for the State,” the order stated.
“The government, while considering the recommendations of SBI Caps, have decided that the entire process of disinvestment and merger may be implemented through an Empowered Group of Secretaries, duly following the available guidelines in this regard and the advice of the Finance department,” it added.
The onus of overseeing the Gangavaram divestment deal (which is more than ₹100 crore) now rests with the Secretaries panel, including whether to follow the State’s reverse tendering process or grant an exemption to sell the stake directly to APSEZ and follow the Central government’s disinvestment policy.
The second issue is the need to divest its holding in GPL, a profit-making and debt-free entity, that has started giving dividends to the State government of as much as ₹83.27 crores (total) since 2016-17. The dividend receipts will cease after divestment.
But, more importantly, how would the State government justify the stake sale, which is expected to fetch ₹650-700 crore, when the value of the underlying land against which the stake is held is itself worth more than ₹3,000 crore in the absence of a policy?
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The State government says that the increase in land value should be seen from the context of utilisation. “In this case, the land can only be used for port and port related work and not for anything else,” an AP Maritime Board (APMB) official said.
The APMB official also said it has not accepted APSEZ’s proposal to value its 5,37,31,700 shares (10.4per cent stake) at ₹120 a share. “We have not decided on the rate. We will discover the share price through a proper and due process,” he said.
SBI Caps had suggested fixing the price at 20 per cent above ₹120 a share.
“We will definitely try to get a higher value based on a formula,” he said.
Disinvestment policy
By aligning with the Central government’s disinvestment policy, the State was “monetising” its stake in the port, he said. “Ironically, otherwise, the State will have to pay the port developer for the 10.4 per cent stake when the port assets revert to the government at a pre-determined valuation at the end of the concession period,” the APMB official noted.
The third issue pertains to the need for merging Gangavaram Port Ltd with APSEZ and the creation of a new special purpose company (SPC) by APSEZ to sign a revised concession agreement with the State government for the balance period after the State exits GPL. The new agreement will incorporate all the terms of the original agreement, including sharing 2.1 per cent of the annual revenue with the State, which has fetched ₹183.56 crore to the exchequer since 2009-10.
Gangavaram port has an initial concession period of 30 years, which can be extended twice for 10 years each.
The benefits accruing to the State government from the merger is unclear, said sources.
Such a merger was not deemed necessary by APSEZ when it acquired 100 per cent control of Krishnapatnam Port Co Ltd (KPCL) recently. In this case also, the land was acquired by the State government, but was leased to KPCL for the tenure of the concession agreement of 30 years, which can be extended by two spells of 10 years each. Since the land was given on lease, the State government did not hold shares in KPCL.