The 2002 strategic disinvestment of public sector undertaking Hindustan Zinc Limited (HZL) is in the headlines again with Solicitor General Tushar Mehta mounting an unprecedented attack on the Central Bureau of Investigation (CBI). He told the Supreme Court that “the fundamental facts presented by the CBI before the Supreme Court were either false or palpably wrong”.

This he did in a bid to reverse the apex court’s November 2021 order which had asked the CBI to register a regular case and investigate the Hindustan Zinc’s disinvestment in 2002 due to prima facie evidence that was before it. At the time (2002), the Centre had divested 26% of its stake, thereby reducing its total stakes to less than 51% and passing on the management control to the Sterlite Opportunities & Ventures Ltd (SOVL).

Mehta argued that the strategic stake sale decision was not made by a single individual as projected by the CBI; that it was a collective three-tier process involving an empowered group of secretaries, a core group of disinvestment and the Union Cabinet. The court didn’t seem convinced, forcing him to withdraw his recall/modification application to file a fresh petition seeking a review of the November 2021 order.

While the three-tier decision making process is not in doubt, the alleged irregularities in the disinvestment have been highly contentious and controversial ever since 2002. It is unlikely to go as the Centre will disinvest its residual stake of 29.5% sooner than later.

Curiously, the Supreme Court’s order for regular investigation came in response to a CBI’s closure report filed in 2017. The closure report sought an end to its preliminary investigations launched in 2013 to look at alleged irregularities in the stake sale. But the court found the CBI’s closure report had been opposed by many of its officers who provided a pile of incriminating evidence to demand an FIR and regular investigation instead. The CBI’s closure report had not addressed those evidences.

Besides, the apex court found a mind-boggling array of material to convince it that there is a prima facie case for investigation. Those details are important given the ongoing privatisation.

Before that, a little background. Hindustan Zinc was earlier known as Metal Corporation of India Limited, incorporated in 1944. It was nationalised in 1976 because the Centre said “zinc and lead are essential raw materials for the economy of the country and are of considerable strategic importance to the country,” in the statement of objects and reasons of nationalising.

The first tranche of disinvestment happened in 1990-91, when 24.8% government stake was sold off to various financial institutions and others. In 2002, 26% stakes were sold to the Sterlite, as a result of which the Centre’s stake fell below 51%. Sterlite acquired 20% more from open market sale offer in 2002 and in 2003 acquired further 18.9% in call option and thus became a majority shareholder with 64.9%.

What did the CBI officers find wrong with HZL disinvestment?

The CBI officers opposing the closure report provided plenty of evidence which the Supreme Court listed to justify overturning it and ordering a regular investigation. Some of those are as follows.

First, the Disinvestment Commission had recommended a 25% disinvestment in HZL, which would have kept the government control and HZL’s PSU status but was overturned by the core group of secretaries and cabinet committee on disinvestment – the latter allegedly on the basis of an official’s note “without further details or reasoning”.

Second, the bidding process was allegedly highly irregular. The Sterlite’s bid of ₹40.51 per share (against the reserve price of ₹32.15 per share), was accepted “in spite of an alleged adverse SEBI order which disqualified SOVL from participation”; disregarding law ministry’s certain recommendations without any justifications; CAG’s objections to disinvesting further 18.92% stakes to the Sterlite in 2002 at ₹40.51 when the prevailing market rate was ₹119.1 per share “resulting in a loss of about ₹650 crore”.

Third, the valuation of HZL was allegedly highly questionable.

The global advisor appointed for valuation in January 2002 turned out to have closed shop by then (“undergone voluntary liquidation on 5 September 2001”). Hence, the CBI failed to trace them. The advisor had relied on ‘discounted cash flow’ (DCF) method, among others (‘comparable companies methodology’ and ‘balance sheet methodology’), while the Disinvestment Commission had specifically recommended ‘asset valuation method’ for strategic sale in such cases, instead of DCF.

Fourth, the asset valuer for fixed assets was appointed by “an unknown public servant”; the valuer “didn’t possess the requisite expertise”, and it “failed to consider” the following:

Goodwill, technical know-how and various assets of HZL, including 150 million ton of ore reserves in various mines, to the tune of ₹80,000 crore;
Government’s earlier investment of ₹83 crore (approx.) in Andhra Pradesh Gas Power Ltd.;
₹175 crore in advance income tax;
Various properties to the tune of ₹20,000 crore (approx.);
Scrap valued at ₹600 crore (approx.);
Value of Kayad Mines, Ajmer; Sindeshar Khurd, Rajsamand; and Bamania Kalan Mines, Rajsamand was not included in the valuation of assets, in spite of their mention in the Share Purchase Agreement;
Valuation of ore reserves was done only for Agucha Mines, and for ten years, by a discounting method of 6%. The life of the mine was allegedly much longer;
Discounts were given on certain leasehold properties, without any basis. The life of Zawar and Rajpura Dariba Mines was allegedly taken as 18 years and 15 years, respectively, without valuing the ore reserves. Value of ore reserves was also not included for Agnigundala lead mines, Sargipalli Lead Zinc Mines, Matun Rock Phosphate Mines and Sindeshar Kurd Mines.
The value of lead and zinc mineral at the time was ₹66,292 crore (approx.). Even if 40% cost of extraction process is excluded, the value would have allegedly been around ₹39,000 crore. Yet, the valuer had valued the ore reserves “at a paltry ₹748.88 crores”;
In October 2001, the voluntary retirement scheme (VRS) was introduced and 1,993 employees were given VRS. In January 2003, 1,856 employees were given VRS. However, an amount of ₹776 crore was taken as VRS expenditure, which allegedly incorrectly assumes that all 7,222 employees and 1,058 officers of HZL have been given VRS;
No mining engineer or geologist in the team of the asset valuers;
Chartered Accountants the CBI consulted said even on the basis of DCF method (which the Disinvestment Commission disapproved), a proper valuation would have put HZL’s share value at more than Rs 1,000.

No wonder Solicitor General Mehta doesn’t want a regular investigation by the CBI, the premier investigating agency against corruption.

Sterlite Opportunities & Ventures

The curious case of strategic sale of Hindustan Zinc