The sale of government’s residual stake of 29.54% in Hindustan Zinc (HZL) to Anil Agarwal’s Vedanta Group is not going to take place anytime soon. This is because the government has decided that it will first amend the Metal Corporation (Nationalisation and Miscellaneous Provisions) Act, 1976, which will enable it to sell its balance stake in the company.
According to the draft Cabinet note prepared by the mines ministry on the subject, a Bill to amend the Act will be brought before the Cabinet within three months of the approval of the proposal by it.
The rationale put forward by the mines ministry for first amending the Act is that the Metal Corporation (Nationalisation and Miscellaneous provisions) Act, 1976, through which HZL was created still exists on the statute book and the Supreme Court in its judgment in 2003 in the matter of similar sale in HPCL and BPCL did not reverse the law. Therefore, the ministry has concluded that further sale of government holding in HZL will require amendment of the Act.
The mines ministry has also said that the law ministry has all along in its opinions in the years 2005, 2012 and twice in 2013 maintained that any further equity sale in HZL cannot be done without suitably amending the Act.
In July this year,
attorney general GE Vahanvati did suggest that the government could take a policy decision for sale of shares in the open market provided the prevailing market price is considered fair. The Cabinet note has said, that “He has, however, not said conclusively that the suggested action can be proceeded with without amending the Act”.
The AG had earlier given his opinion that HZL was no longer a government company and that the stake sale could proceed so long as the price discovery was through an open auction.
The latest development comes as a setback to that perception.
In a recent interview with FE, Agarwal had said that he wanted to buy the residual government stake for “housekeeping” as then, the structure of the company would be clear.
On the government’s decision to sell the stake through open auction, Agarwal had said: “It is not very fine with us, but we are okay with it. Once this happens, it would become a normal public company.”
The Cabinet note says that although HZL is not a government company as on date (Agarwal’s company now holds 65% stake in it), it owes its existence to Section 9 of the Act which exists even today and cannot be ignored.
Analysts tracking the developments relating to the process of the residual stake sale said that such positions are taken to be extra-cautious in the light of complaints by certain sections that the company was undervalued when sold.
The CBI is also investigating how the sale was done without Parliament's nod.
However, the government has failed to highlight the positives of its decision. In the case of HZL, the company’s share rose from Rs 1.68 in the year before Agarwal's Sterlite bought it in 2002 to Rs 130.60, taking its market valuation from Rs 706 crore to over Rs 55,000 crore, a jump of 78 times. Sales have risen over 10 times and profits 101 times in the last 11 years while investments rose from minus Rs 3 crore the year Sterlite bought it to Rs 3,200 crore in 2012-13.
The background of the case is as follows: HZL was incorporated in 1966 as a public sector undertaking after the takeover of the erstwhile Metal Corporation of India Ltd (MCIL), a private company by an ordinance promulgated on 22/10/1965. On account of some disputes, the Act was replaced by the Metal Corporation (Nationalisation and Miscellaneous Provisions) Act, 1976.
The government disinvested 24.08% of its equity in HZL in 1991-92 in the domestic market. Later, in 2002, it disinvested 26% equity in favour of Sterlite Opportunities and Ventures Ltd (SOVL) along with management control. Subsequently, SOVL acquired 20% equity shares of HZL from the market through the mandatory open offer.
The shareholders' agreement contained provisions for two call options, out of which the first call option was exercised by SOVL in August 2003. Currently, SOVL's stake in the company is at 64.92%, the central government holds 29.54% and the balance 5.54% is with the public and institutions.
SOVL was entitled to exercise the second call option for the balance government's stake upon the expiry of five years from the closing date, 10/04/2007. It exercised the second call option in July 2009. However, it was rejected by the mines ministry in the light of the opinion of AG given in 2006 stating that laws do not permit it.
Upon the rejection of the second call option, dispute resolution mechanism was invoked and the matter is currently before an arbitral tribunal, the next date of which is on November 13.