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Sparks fly over ITDC, Hotel Corp divestment

Parul Gupta

The joint controller general of accounts, a member of the evaluation committee for the India Tourism Development Corporation and the Hotel Corporation of India, has raised doubts over the valuation process and the role of global advisors in the divestment of these two public sector companies.

Joint CGA PPS Brar has written a letter dated September 27 to divestment secretary Pradip Baijal, saying, "CGA feels that a conflict of interest exists in having the same advisor being involved in the opening of the financial bid and also for the valuation of the undertaking. The advisor receives his commission on the basis of the transaction value of the undertaking.

Involving the same entity in the valuation exercise raises the issue of a possible conflict of interest. Excessive reliance on advisors could lead to situations of substantial abuse and optimal outcome for the government as well as the privatisation process."

While Lazard India Limited is the advisor for ITDC divestment, Jardine Fleming is advising the government on the divestment of HCI. According to sources, the ITDC advisors will receive 0.5 per cent of the total sale value of the enterprise. Both LIL and Jardine Fleming, however, refused to comment on the issue.

In yet another letter dated November 6, Brar said there was a need to review the valuation process and more time and information should be given to the evaluation committee to fully appreciate the analysis and assumptions of the advisor.

He added that valuation was a complex exercise where the reserve price could be completely changed through altering any one of at least 20 assumptions made by the advisor.

"Due to this, a thorough understanding of the assumptions and financial model was necessary before the reserve price was fixed by the evaluation committee for which more time should be given to the EC," he said.

Brar suggested that the evaluation committee should specify the financial model to be used by all advisors even before the financial bids were invited. "The standardisation will greatly facilitate understanding of the assumptions and the reserve price," the letter said.

Brar suggested that the government needed to supplement the existing system of advisors' valuation with internationally accepted procedures of multiple valuations where a range of acceptable valuations was provided to the decision-makers along with the justification for such valuations.

He also said in the present case, the advisors should be asked to make a presentation regarding their assumptions, provide a copy of their financial model and make available a copy of their valuation report to the evaluation committee members after the bids are received.

"Only after these steps have been completed and the members have at least a day to read the advisor's valuation report, should the evaluation committee be convened for discussing the reserve price fixed by the advisor. Asking the members to approve of a reserve price on the basis of a brief presentation by the advisor is neither fair to the members nor the process," the letter said.

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