The CAG's (Comptroller and Auditor General) report dissects technicalities. The recommendations which flow from it are impractical and will further impede reform process.

One feature that stands out is that the point about which so much was made -- that the Juhu Hotel had been valued at Rs 246 crore (Rs 2.46 billion), and this had mysteriously been brought down to a reserve price of Rs 101 crore (Rs 1.01 billion) -- finds no mention in the report at all.

Even though the report's observations deal with technicalities and procedures, and it does not allege impropriety, I reiterate my offer to face any inquiry that the prime minister or finance minister may deem fit.

The CAG's report contains two kinds of observations. One set deals with some technical issues. The second set, I am sorry to say, try to paste a colour on the work that was done.

I will deal with each of these.

The report says that because there was only one bidder, the benefit of competition could not be obtained. The facts of the matter are as follows:

(i) The report itself records that while 20 parties expressed interest in the transaction in the initial stage, 16 withdrew as the process proceeded.

It says that there is no written record why these parties withdrew from that transaction. The decision of each bidder to continue or not continue is a commercial decision. In case after case, in other sectors also, as the process proceeded and the potential bidders learnt the condition of the enterprises, they withdrew.

In fact, the ministry of disinvestment, after one-and-a-half to two years' effort, had to return 11 cases to the ministry of heavy industry as no bidder was left in the end.

(ii) The policy question -- what should be done if there was only one bidder -- was considered by the CCD. The CCD had then decided that the process must proceed even if there is only one bidder. This is exactly what was done in the cases of hotels.

(iii) The report says that a written record should be kept why a bidder has withdrawn. Making a written record of the formal reasons that the different bidders may give for the withdrawal will make no difference whatsoever. In fact it will be another factor that will dissuade potential bidders from entering the process at all. And this will, in the long run, defeat the very purpose which the CAG wants to achieve -- that is to maximise competition.

(iv) The report says that the surcharge of two per cent on corporate tax was not taken into account; that this lowered the tax rate, and thereby raised the cost of debt in the calculation.

The CAG report itself gives the reasons on account of which Advisors did not build this surcharge into the calculation. The report itself notes that this surcharge has varied from time to time from 15 per cent to 2 per cent.

It will be impossible for the government to prescribe a particular figure and a particular way for calculating the cost of debt irrespective of the sector and the borrower. However, this is a technical issue and experts can be invited to visit it again.

(v) The CAG raises another equally technical point. The report observes that the-risk free equity used for the calculation should have been for 10 years at 9.3 per cent instead of at 9.9 per cent for 25 years. This kind of issue was debated time and again by experts and officers.

The successive records of the evaluation committee of joint secretaries will contain reasons on which the particular figures and periods were chosen.

It would be quite a feat to prescribe a uniform rate irrespective of the sector and irrespective of the uncertainty that afflicts different periods for which these calculations are made. But even so, this is another technical issue which experts can revisit. And see whether they can come up with uniformity across sectors and periods of the kind that the CAG wants.

(vi) The CAG finds that financial strength of the bidder was not adequately scrutinised. The fact of the matter is that the bidder paid the entire amount and the government got every paisa of the bid price of Rs 153 crore (Rs 1.53 billion).

Secondly, eight different banks (Bank of India, Punjab National Bank [Get Quote], Lord Krishna Bank, Union Bank of India [Get Quote], Canara Bank [Get Quote], LIC [Get Quote], UTI Bank [Get Quote] and Indian Bank [Get Quote]) independently assessed the strength and creditworthiness of the bidder.

Each of them came to the conclusion that the bidder was creditworthy and the transaction was viable. Is it the case that all of these eight banks were also negligent?

(vii) The CAG report says that extensions were given to the bidder by which time he had to make the payment. The fact is that had the two extensions of a few days not been given, the government would not have received Rs 153 crore. And the bidder would have got out of the transaction in which he had bid 53 per cent more than the reserve price.

The consequence would have been that in other bids also, whenever the bidders felt they had over-bid, they would have used this route to get out of the bid.

The government correctly held the bidder to his commitment and got the full amount that he had stated in his bid.

(viii) In a surprising observation, the CAG says that interest was not charged for late payment. Financial closures usually take two to six months. In this case the hotel was not, repeat NOT, handed over to the bidder till he paid the required amount and all the transaction documents were completed.

Where was the question of charging him interest when he had not been given possession of the hotel?

(ix) The CAG says that the reserve price was taken at the lower end of the band. His report sets out the reasons at page 45-46 on account of which the Evaluation Committee [headed by the joint secretary and financial adviser, ministry of civil aviation and comprising senior officers of ministry of disinvestment, ministry of finance, department of public enterprises and managing directors of Air-India and Hotel Corporation], chose the reserve price which it did.

The government found these reasons to be valid. It is important to remember that each of the judgements had to be made by officers and the government in circumstances prevailing at a particular time. In any event, the CAG has not alleged any wrongdoing or impropriety even in regard to this decision.

(x) I come now to a distressing aspect of the report. It says that the government facilitated the financing of this transaction.

And the evidence he gives for this 'finding' is that officials and I met officials of banks. This is strange indeed. We met officials of the banks precisely because we did not take the word of the bidder at face value.

On the one side, the CAG says the government did not do enough to verify the financial strength of the bidder. And on the other, the implication is that government should not have cross-checked his statement with the banks that they were willing to extend him loans!

(xi) The CAG finds fault on the ground that in some particulars, the practice followed in sectors other than hotels was not followed in the disinvestments of these hotels.

On the one hand, the report completely overlooks the fact that because of the dire circumstances in which these hotels had fallen, because of the losses that were being incurred in these hotels, special steps had to be taken to ensure that the disinvestment decisions were successfully carried through.

On the other, when criticising some aspect of this transaction -- for instance, in regard to allowing a company to acquire and hold share capital through an investment vehicle -- the report glides over the fact that this was precisely what was being allowed in other sectors!

In any event, even though the report deals with technicalities and procedures; even though the recommendations that flow from it are impractical, I will be happy to face any inquiry which the prime minister or finance minister deem is warranted.

-- PTI