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New Delhi: The divestment saga of Central Electronics (CEL) deserves more attention than it is getting.
The broad details are well known enough. The public sector undertaking (PSU), founded in 1974 to commercially exploit technologies developed by national laboratories and indigenous R&D institutions, briefly hit the headlines last November when the Narendra Modi government announced its sale to Delhi-based Nandal Finance and Leasing for Rs 210 crore.
In the three months that have followed, the government has not only attracted charges of under-valuing CEL, a link between the only two bidders who participated has surfaced. The sale has been consequently challenged not only before the Delhi high court but also before the Lokpal.
For its part, the government has put the sale on hold, saying it will study the complaint about the two bidders knowing each other.
This, however, is just the start.
The Central Electronics Saga
CEL’s mandate as a PSU is “to engineer and supply products, critical materials and knowledge services for India’s strategic sectors like Defence, Railway, Security Surveillance and Renewable Energy and address quality and security concerns of the nation.”
Back in 2016, the profit-making PSU was first placed in the Bharatiya Janata Party-headed National Democratic Alliance government’s list of PSUs to be sold. In subsequent years, notwithstanding the Union government’s atmanirbharta (self reliance) push, its divestment process continued – perhaps because India’s slowing economy is squeezing the the Union government’s finances.
Then came the first of the surprises. Despite an order book of Rs 1,592 crore and a land-holding of 50 acres just outside Delhi, not to mention its intellectual capital, the NDA pegged CEL’s reserve price at Rs 194 crore.
Adding to the intrigue, Yatendra Gupta is on the board of Nandal Finance and Sharda Tech Private Limited – a group firm which has as one of its directors someone who is also on the board of JPM Power, which is a part of JPM Industries.
Of the two, South Delhi-based Nandal Finance and Leasing bid higher – Rs 210 crore – and was awarded CEL by a government panel comprising road transport minister Nitin Gadkari, finance minister Nirmala Sitharaman and junior science and technology minister Jitendra Singh.
This too was a puzzle. Nandal Finance and Leasing has no background in science or engineering. Nor did Premier Furniture and Interiors, the firm which owns 99.96% of Nandal Finance. Why were they acquiring CEL?
In the days that followed Nandal’s selection, a political slugfest ensued. The Congress and the Communist Party of India (Marxist) echoed CEL’s employees, saying the PSU had been undervalued. Once it emerged that the two bidding groups appeared to have a link, the Centre itself halted the disinvestment process, and has promised to investigate.
Intrigued by these patterns – alleged under-valuation, employees challenging the disinvestment in court, an unknown firm picking up a national asset, both bidding groups having links – The Wire took a closer look at CEL’s divestment trajectory.
We found two things. One, CEL is indeed being undervalued. And two, the promoters of the winning firm, Nandal, also have business dealings with a senior BJP leader in Uttar Pradesh.
Reasons for suspecting undervaluation
At the best of times, valuing a CPSU like CEL is not easy.
Set up to commercialise research and development by India’s scientific bodies, its value extends beyond its balance sheet to wider benefits – like import substitution and self-reliance in areas like energy and defence – for the country.
For instance, the firm is the sole supplier of “phase control modules” for the Akash missile system and weapon-locating radars. In 2019, India was importing one of these components at Rs 50-70 lakhs apiece. (See letter below)
In other words, the financial gains from selling the company have to be weighed against a larger set of developmental, defence and social costs.
That said, even if we ignore the wider benefits that accrue from CEL’s scientific work – and focus only on its financials – the NDA government is undervaluing the PSU.
Balance sheet and pending orders
In the past, Tuhin Kanta Pandey, the secretary of the Department of Investment and Public Asset Management (DIPAM), has pointed at the balance sheet value of CEL’s equity – Rs 111 crore – to argue Rs 210 crore is a good price.
His assertion is challenged by CEL’s ex-employees. According to them: “As of October 31, 2021, CEL has pending orders worth Rs 1592 crores. With these orders alone, CEL would give GoI a gross profit of about Rs 730 crores.”
Apart from the orderbook, a current employee told The Wire on the condition of anonymity, CEL also has a 5 MW power plant on the site. “It’s not scrap. It’s in running condition. We also have debtors. We will get some money from them as well,” he said.
Then, apart from the firm’s intellectual capital, there is the 50 acres of land at Sahibabad, just outside Delhi. “If we go by the Ghaziabad circle rate, this land will be worth Rs 440 crore,” said the employee. “But it opens out onto a highway and has a railway track running along on one side. And so, its market rate will be higher – about Rs 660 crore.”
In its questionnaire to DIPAM, The Wire asked Pandey how the reserve price of Rs 194 crore was arrived at.
In its response, the department said the professional advisors appointed by the government – Resurgent India, the transaction advisor; and Protocol Insurance Surveyors and Loss Assessors, the asset valuer – relied on three “business valuation methodologies”. These are, it said, Discounted Cash Flow method (DCF), Balance Sheet Method, and the Asset Valuation method.
The first, said the department, yielded a valuation of Rs 193.98 crore. The second, Rs 111.23 crore. And the third, Rs 172.87 crore. Thereafter, said the department, “The IMG, after due consideration of all relevant factors, recommended the ‘Reserve Price’ of Rs. 194 Crore arrived at by using the DCF method of valuation, which was duly considered and approved by the CGD.”
The IMG (inter-ministerial group) and the CGD (core group of secretaries on disinvestment) comprise senior bureaucrats.
The 2019 meeting where it was decided to press ahead with CEL’s disinvestment had the following bureaucrats in attendance:
- Cabinet secretary Rajiv Gauba;
- Atanu Chakraborty, Department of Economic Affairs;
- Sailesh, Department of Public Enterprises;
- DIPAM’s Tuhin Kanta Pandey;
- Anoop Kumar Mendiratta, Department of Legal Affairs;
- Shekhar Mande, Department of Scientific and Industrial Research;
- A. Giridhar, additional secretary at the Cabinet Secretariat;
- Anil Kumar Jha, additional secretary at the Department of Revenue;
- Dheeraj Bhatnagar, MM Daula and Anuradha Thakur of DIPAM;
- K.V.R. Murthy, joint secretary at the Ministry of Corporate Affairs;
- B.N. Sarkar, the Chairman and Managing Director of CEL;
- Sibi Chakravarthy, a deputy secretary at the Cabinet Secretariat; and
- Ajit Pai, an Officer on Special Duty at NITI Aayog.
The government’s response to The Wire’s questions deserves a closer look. As the department itself noted, one of these methodologies, the Balance Sheet Method, “does not consider the earnings potential of (a firm’s) assets and is, therefore, seldom used for valuing a going concern.”
That leaves us with Asset Valuation and Discounted Cash Flow.
How well did they capture CEL’s value? Asset valuation, first.
Hiking liabilities, reducing assets
In its January 17, 2022 affidavit at the Delhi high court – where the disinvestment deal has been challenged – DIPAM said Resurgent India and Protocol Insurance Surveyors and Loss Assessors pegged the value of CEL’s immovable assets (land, building, machinery, etc) at Rs 251.45 crore; current, non-current assets, cash balance, capital work in progress and intangible assets at Rs 330.99 crore.
The company’s liabilities, however, stood higher – at Rs 409.56 crore. These include “settlement of all borrowings on the balance sheet, including bank loan, Government loan, the current liabilities (trade creditors, non-trade creditors, contingent liabilities & statutory liabilities), estimated VRS cost of all employees, Capital Gain Tax liability,”. All of these, says the affidavit, have been “adjusted (reduced) from the asset valuation.”
In its response to The Wire, the department reiterated these numbers.
However, the assets and liabilities numbers are puzzling.
The NDA government pegged the combined value of land, building and machinery at Rs 251.45 crore. CEL employees, however, say the land alone is worth more. That circle rate yields a value of Rs 440 crore. The market rate is higher yet, they say, at Rs 660 crore.
In the past, when asked about the land, Pandey has said: “It is not freehold land. It is a leasehold land, and out of 90 years lease, 46 years have already gone.”
This mirrors what the government told the Delhi high court: “CEL has 2,41,614 square yards of leasehold land on a lease of 99 years, of which only 44 years remain.” The value of the “balance lease period”, it said, has been taken for arriving at the land’s market value.
This makes little sense. First, 44 years is not an ephemeral wisp of time. Indian states now give 30 year leases to companies. Also, leases can be renewed. In addition, the revised bid documents allow the owners of CEL to sell its land after three years – an admission that the government thinks the land has value.
And so, The Wire wrote to Pandey, Resurgent India and Protocol Insurance Surveyors and Loss Assessors, asking about the land’s valuation. The last two did not reply. DIPAM did.
According to the Asset Valuer’s report, said the department, land rates near the CEL plot range between Rs 20,000 to Rs 23,000 per square metre. “Therefore, the Asset Valuer adopted a land rate as prescribed by UPSIDA which is Rs. 21,803/- per Square Meter for the subject property by pro-rating the value for the balance period of lease.”
241,614 square yards translates to 202,020.076 square metres. Multiply that by Rs 21,803 and you will get Rs 440,46,43,717. Or Rs 440 crore. CEL employees, as said above, peg market value at Rs 660 crore.
Back of the envelope calculations also suggest undervaluation. As per property websites, the going rent for industrial land in Sahibabad is Rs 2.6 lakh for 10,000 square feet. Now, 241,614 square yards works out to 2174,526 square feet. Or 217.4526 x 10,000 square feet. Multiply 217.4526 with Rs 2.6 lakh and you get Rs 565,37,676. Or Rs 5.65 crore a month. Or Rs 67.8 crore a year.
In effect, with CEL being sold for Rs 210 crore, Nandal could recover its investment in a little over three years by just leasing out the land. In contrast, as E.A.S. Sarma, a former secretary to the government of India, told The Wire, states like Andhra charge 10% of prevailing market value as the annual rental.
With such a calculation, the land alone should be worth Rs 678 crore. What we have instead is an omnibus number of Rs 251 crore for land, building and machinery.
Turn now to liabilities. CEL’s long-term borrowings stand at just Rs 1.88 crore. As for liabilities towards creditors, in any supply chain, what a firm owes its vendors is more or less counterbalanced by what its customers owe it. For that reason, a large chunk of that Rs 409 crore has to come from VRS and capital gains tax liability. But the cost of VRS should be worked by the bidder into its offer, not deducted upfront by the government. As for the latter, assuming DIPAM is alluding to the capital gains tax the Government will have to pay, it should have tacked a capital gains surcharge onto the eventual price of CEL – not deducted it from the PSU’s asking price.
The Wire asked DIPAM why the “VRS cost of all employees” and capital gains tax liability were deducted from CEL’s reserve price. The department didn’t respond to the question about Capital Gains Tax liability.
On VRS, it said: “Asset Valuation method is useful in case of liquidation/closure of the business and generally not used for sale on a “going concern” basis. In the case of CEL, the strategic disinvestment is on a “going concern” basis so that the company employees continue to remain employed and the company continues to remain in business.”
And yet, the cost of laying off all employees has been deducted from the reserve price.
According to the CEL employee, the government is under-counting assets and inflating liabilities. “This is being done to reduce the value of CEL,” he charged. “For the government to say that we managed to sell a company worth Rs 110 crore for Rs 220 crore.”
The bigger point is this: With neither the Balance Sheet nor the Asset Valuation Method capturing the full value of CEL, Discounted Cash Flow, with its Rs 193.98 crore valuation, was the only way to go.
A look at Discounted Cash Flow
The problem with Discounted Cash Flow (DCF) is that its valuations hinge on assumptions.
As DIPAM’s response said: “This methodology works on the premise that the value of a business is measured in terms of future cash flows, discounted to the present time at an appropriate discount rate.”
We do not know, however, the discount rate used by the government. Nor the number of years they projected cash flows for. This is important. Change either number and a firm’s valuation will change.
Take Congress spokesperson – and a professor of finance – Gourav Vallabh. When he ran his own DCF calculations, making what he called “other conservative assumptions about the future growth”, he found CEL’s valuation lies somewhere between “₹1,300-1,600 crore.”
Alternative valuation frameworks, he told the press, also yield higher valuations. Equity valuation as per share market price, for instance, nets a valuation of Rs 957 crore.
DIPAM’s response to The Wire did not get into details about discount rates and the number of years for which earnings were computed.
Without a discussion on those, the government’s DCF numbers cannot be taken at face value.
A market-based pricing approach
None of this – even the deduction of “cost of VRS for all employees” – would have mattered if CEL had seen a lively auction.
The government’s internal correspondence around divestment too stresses on the use of market-based price discovery. In the case of CEL, however, the fact that there were just two bidders – both connected to each other – means a fair discovery of value might not have taken place.
As Sarma told The Wire, both the bids stayed close to the Rs 194 crore number.
Can reserve price of 100% stake sale of a PSU be fixed at 44% of its Land Value only?
Can a profitable company with a pending order book of Rs 1,592 Cr be sold for Rs 210 Cr?
Can a company be sold when there were only 2 inter-related bidders?
This happened in the sale of #CEL. pic.twitter.com/Ip5H4dTH4X
— Prof. Gourav Vallabh (@GouravVallabh) December 29, 2021
The Wire asked Pandey if the process yielded a fair determination of CEL’s market value given the two bidders are connected. In its response, the department said it has sought legal opinion. “Pending examination… the Letter of Intent (LoI) has not been issued to the successful bidder as per the usual procedure.”
Even as the government mulls its response, The Wire has found that the beneficiaries of this transaction – the promoters of Nandal Finance and Leasing – have links to BJP leaders in Uttar Pradesh.
The political economy of divestment
Nandal Finance and Leasing is owned by Premier Furniture and Interiors.
In turn, Premier Furniture and Interiors is owned – directly, through family members and group companies – by two brothers, Pradeep Kumar Gupta and Yatendra Kumar Gupta.
Pradeep Gupta and Yatendra Gupta also run Sharda University, a private university with campuses in Noida, Agra and Mathura.
According to three people The Wire spoke to – a political observer in Lucknow, a veteran reporter in Agra, and a source with contacts in the Rashtriya Swayamsevak Sangh – the brothers are close to Naveen Jain, the current mayor of Agra, promoter of infrastructure company PNC Infratech, and a co-treasurer of the BJP.
“The brothers are very close to him. Through him, they have close ties with the state BJP,” said the political observer, on the condition of anonymity.
The veteran reporter supplied further context. “Pradeep Kumar Gupta and Yatendra Kumar Gupta started by doing small jobs (‘chhota mota kaam’) with Naveen Jain,” he said on condition of anonymity.
“That was 25-30 years ago. After that, Jain went into construction and they began setting up colleges and then Sharda University.” They are not related, he said, but there is a friendship (“dosti hai”).
The brothers, as The Wire independently established, have had business dealings with Jain’s family.
The promoters of Marj Infrastructure are Madhavi Jain, Meena Jain, Renu Jain and Ashita Jain. The first is the spouse of Chakresh Kumar Jain, a brother of Naveen Jain. The second is the spouse of Pradeep Kumar Jain, another brother of Naveen Jain. The third is the spouse of Naveen Jain. The fourth, Ashita Jain, spouse of a Yogesh Jain, lives at the same address as Meena Jain.
As for the other company, RV Technocore, all four women are its shareholders.
Between them, the brothers – Pradeep, Naveen and Chakresh – run PNC Infratech, a civil construction firm with most of its operations in Uttar Pradesh.
Of them, Naveen Jain is the biggest individual shareholder in the company. The firm, which gets most of its work from government contracts, has grown almost five-fold in the last ten years – despite defects in its work. In addition to PNC Infratech, the brothers have businesses in sector like real estate.
Apart from Jain, Pradeep and Yatendra Gupta have been linked to one more BJP leader – current MP Ram Shankar Katheria. A RSS pracharak, Katheria has been a chair of the National Commission for Scheduled Castes and a Minister of State in the Human Resource Development Ministry till July 2016. At one time, he was also considered a contender for the post of the BJP’s chief for Uttar Pradesh.
“In Agra, these people (Naveen Jain, the Gupta brothers and Katheria) were a team. Any issues about Agra, they would work together on them,” said the local reporter.
The Wire sent questions to Jain, Katheria and the Gupta brothers asking them to confirm if they know each other. We also asked the Gupta brothers their reason for wanting CEL, their plans for it, and, given their links to BJP leaders, if this transaction should be seen as cronyism.
These questions were also sent to Ajeet Singh, the public relations officer of Sharda University. He was told about these questions on phone as well. There was no response.
The last of these questions – if, given complaints of undervaluation and Nandal’s links with BJP leaders, this deal should be seen as cronyism – was also sent to Pandey, the secretary of the Department of Investment and Public Asset Management.
In its response, the department challenged that question, saying: “It is reiterated that the entire disinvestment process has been carried out in an open competitive bidding process in a transparent manner.”
But, as this report shows, there are large questions about the valuation exercise.
It’s a strange tale, this tale of CEL.
Despite the government’s atmanirbharta drive, a profitable PSU which converts scientific breakthroughs into marketable (and import-substituting) products in areas like defence is listed for divestment.
Its reserve price is based on approaches that don’t capture its value. Despite under-valuation, however, it doesn’t find any bidders. This, incidentally, is not new. As The Wire has reported earlier, even in states like Gujarat, firms increasingly know who the preferred party is, and don’t consequently bother participating.
In the case of CEL, bids came only after norms are relaxed further – but from just two firms, both connected to each other. The promoters of the winning firm had links to influential BJP leaders.
That is just the start. A NITI Aayog document on strategic disinvestment draws a demarcation between loss-making and profitable PSUs, and says: “On strategic disinvestment, it’s expected that the strategic buyer will bring in funds/technology/new management etc. for the optimal development of business potential and growth of the companies.”
The bid document for CEL, however, says something quite different. According to it, land and other assets can be sold after the first three years; employees can be retrenched after the first year; shares in CEL can be transferred after three years. On the whole, the bidder has to continue CEL as a going concern for just the first three years.
On one hand, the government defends divestment saying it will get PSUs into better hands. At the same time, it defines eligibility in a manner where others can step in as well. It says the firm is being handed out as a going concern but introduces clauses that make asset-stripping easy.
In the case of CEL, Nandal stepped in. Asked about a process which nets such a buyer, DIPAM said: “It is a part of the disinvestment policy of the Government to not make sectoral experience a qualification criterion for bidders. This is so because the Government believes that in the modern economic world anyone with the right resources and entrepreneurship can enter into any business and have the requisite professionals.”
That is one possibility. Another possibility is a yard sale of the PSU after pausing to honour DIPAM’s rhetorical safeguards against asset-stripping.
The gap between rhetoric and actions continues to stay wide.
One final point. CEL is not the only firm getting under-valued. Take DNH (Dadra Nagar Haveli) Power Distribution Corporation. It posted a profit of Rs 229 crore for the year ending 31 March 2021, up from Rs 114 crore the previous year. As a part of the government’s drive to privatise, its reserve price was pegged at Rs 151 crore – and it was bought by Gujarat-based Torrent Power for Rs 550 crore.
India needs to pay closer attention to the great asset sale underway.
M. Rajshekhar is an independent reporter studying corruption, oligarchy and the political economy of India’s environment. He is also the author of Despite the State: Why India Lets Its People Down and How They Cope.