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A tale of two hotels

Saturday 21 May 2005, by SRIDHAR*V.

Former Disinvestment Minister Arun Shourie finds himself in the dock following the CAG report on the sale of ment stake in two five-star hotels during his tenure.

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Former Disinvestment Minister Arun Shourie at a press conference in New Delhi on May 5.

WHEN zeal substitutes for prudence, the results can only be controversial. Former Disinvestment Minister Arun Shourie, an ardent champion of privatisation, finds himself in the midst of a raging controversy over his role in the privatisation of two five-star hotels during his tenure in the Bharatiya Janata Party-led National Democratic Alliance (NDA) government. The severe strictures passed in the latest report of the Comptroller and Auditor General (CAG), tabled in Parliament on May 6, have therefore come as a major source of embarrassment for the BJP and the NDA, as well as for Shourie.

The CAG’s observations have brought into focus the controversial nature of the sale of government stake in two hotels owned by the Hotel Corporation of India (HCI), a subsidiary of Air-India. The two five-star hotels in Mumbai, Airport Centaur and Juhu Centaur, were sold to private companies in March-April 2002.

The 317-room Juhu Centaur was sold to Tulip Hospitality Services Private Ltd for Rs.153 crores in March 2002. In April 2002, Airport Centaur was sold to Batra Hospitality Private Ltd for Rs.83 crores. The CAG’s adverse remarks have strengthened the claims of critics of the NDA that its aggressive privatisation programme was not above board, resulting in public assets being sold to private parties at bargain prices.

On May 13, the United Progressive Alliance (UPA) government announced a probe into the disinvestment in the Centaur hotels. Making a suo motu statement in both Houses of Parliament, Finance Minister P. Chidambaram said the government had decided to order an inquiry after examining the CAG report. He said the government would announce the nature and scope of the inquiry later.

Chidambaram had earlier, on May 4, told the Lok Sabha that a probe would be considered after the CAG submitted its report. The Left parties had demanded a quick and thorough probe into the transactions. Communist Party of India (Marxist) member of the Rajya Sabha Dipankar Mukherjee, who headed a 2003 probe by a parliamentary committee into the sale of Airport Centaur, wanted to know how many more reports the government required to initiate action on the sale of the hotels when the parliamentary standing committee and the CAG had passed strictures.

The BJP reacted immediately. It said the inquiry would be "nothing short of witch-hunting".

THE CAG focussed its attention on the fact that the financial bids for the two hotels were "single bidder transactions". It pointed out that although 20 parties bid for Juhu Centaur and 21 bid for Airport Centaur, there was only one financial bid for each hotel. It observed that absence of competition prevented better realisation from the sale for the government.

In an indictment of the systems and processes followed by the Disinvestment Ministry, the CAG observed that it could not find records to show whether the government took steps to "generate adequate competition". In particular, it observed that "logs of contacts, communication with bidders and reasons for the withdrawal of parties" were "not documented". It pointed out that its inability to get access to these details prevented it from checking whether adequate steps were taken by the government to generate better response from bidders. The CAG also noted that the Disinvestment Ministry’s replies to its queries did not address the concern of its audit about what steps the NDA government took to "deal with limited competition throughout the sale process".

The third main point made by the CAG was that its audit found inconsistencies in the valuation of the properties by the global adviser to the disinvestment, J.P. Morgan India Private Ltd. The CAG observed that its audit "noticed inconsistencies in assumptions underlying the valuation process, which lowered the enterprise value of the properties". It pointed out that there were differences in the approach adopted by the Disinvestment Ministry in the Centaur hotels case when compared with cases relating to other public sector companies that were privatised by the Disinvestment Ministry. In the sale of Airport Centaur, the assumptions made for the valuation of the properties and fixation of reserve price "were not consistent with the practice followed by the Ministry in other cases". In conclusion, the CAG commented that there was no evidence to show that the government’s desire to sell the properties quickly was balanced by efforts to get the best possible price.

The CAG also observed that the winner of the bid for Juhu Centaur was given "repeated extensions, and relaxations were allowed to facilitate the sale". On May 4, Chidambaram told the Lok Sabha that Shourie seemed to have taken an "active interest" in the sale of the Juhu hotel to Tulip Hospitality. Shourie responded the following day by calling for an open probe into the sale of the two hotels.

The CAG was also critical about the Disinvestment Ministry’s statement that Juhu Centaur was making losses. It observed that the hotel was making profits until the decision to sell it was taken in 1998. The CAG pointed out that Juhu Centaur’s "financial condition deteriorated after the disinvestment process started and (after) its future status became uncertain". It noted that even after the decision to disinvest the hotel was taken, "a large part of the hotel was under major renovation and this unit of HCI was in possession of potential tangible assets."

It said the adjusted asset value of Juhu Centaur would have been Rs.134 crores, Rs.32 crores higher than the reserve price that was fixed for the hotel. The report observed that owing to inadequate initial scrutiny of the financial strengths of the bidder, the Ministry had to relax several conditions and make interventions at a later stage to ensure the conclusion of the sale. This, it observed, "cannot be viewed as a good practice".

SHOURIE claimed that the disinvestment in the case of the two hotels was fully in conformity with the procedures followed by the government since 1991. He claimed that the disinvestment was pushed through because it would deter bidders in other cases of disinvestment from wriggling out after placing financial bids if they realised their bids were well above the reserve price.

Referring to the CAG’s remark that he facilitated the financing of the acquisition of Juhu Centaur by a clutch of banks, Shourie told The Hindu Group that this part of the report was "not worthy of a constitutional authority". He said that he met the banks’ representatives only to ensure that Tulip Hospitality did not wriggle out of its commitment.

Shourie alleged that the CAG appeared to adopt different standards in different cases. He pointed out that in the case of the privatisation of the Delhi Vidyut Board, the Congress-ruled Delhi government entered into negotiations with single bidders. Moreover, he alleged that the "dilution" of norms relating to power loss reduction resulted in a discrepancy of Rs.1,107 crores. Yet, he pointed out, the CAG did not pass any strictures in this case.

Dipankar Mukherjee said Shourie was "intimidating" the CAG with his comments. "This is direct intimidation as well as tampering with evidence. Some affirmative action needed to be taken," he said.

IN 1997, the Disinvestment Commission, in its Sixth Report, recommended the sale of the HCI. In February 2000, Air-India appointed Jardine Fleming Securities India Ltd. (later J.P. Morgan) as the global adviser for the sale of the two hotels. In June 2001, it appointed a valuer for the two properties. However, in September 2001, based on a government decision, the Department of Disinvestment took over the process of disinvestment of assets belonging to the HCI. This reversed an earlier recommendation of the Disinvestment Commission that parent public sector undertakings would be in charge of disinvestment in their subsidiaries.

The sale of the two five-star hotels had repeatedly rocked Parliament. Even MPs belonging to the NDA, which was in power then, and those otherwise supporting privatisation, alleged irregularities. In December 2002, Sanjay Nirupam, former Shiv Sena member of the Rajya Sabha (he recently joined the Congress), alleged that the eventual buyer of Airport Centaur, A.L. Batra, had been favoured. In October 2002, four months after acquiring the property, Batra Hospitality sold Airport Centaur to the Sahara Group, which has an airline company. In November 2002 the property was renamed Sahara Hospitality Private Ltd. Sanjay Nirupam alleged that the resale violated the terms of the sale agreement. Within a span of four months the Batra Group, which has other interests in the hotel industry, managed to make a profit of Rs.32 crores. The resale raised questions about whether the government had been denied the best possible price.

In March 2003, the Parliamentary Standing Committee on Transport, Tourism and Culture, chaired by Dipankar Mukherjee, conducted an inquiry into the sale of Airport Centaur. It observed that while the initial bidder was the A.L. Batra Group, this was changed to Batra Hospitality Private Ltd after the bidding process was completed and it was declared to be the successful bidder. The committee also found that a petrol pump across the hotel belonging to it and operated by Indian Oil Corporation was also sold without obtaining clearances from the Union Ministry of Petroleum. The committee recommended a probe by the Central Vigilance Commissioner (CVC), which was rejected by the NDA government.

Both the CAG and the Parliamentary Committee found improprieties in the sale of Airport Centaur. In November 2001, the Evaluation Committee had fixed the reserve price for the hotel at Rs.76.20 crores; however, the offer by A.L. Batra, the sole bidder, was only Rs.65 crores. In December 2001, the Evaluation Committee modified the terms of the sale by making it more attractive to prospective bidders in the hope of getting a better response. This was done by reducing the turnover levy - from 6 per cent to 2 per cent - that would be payable to the Airports Authority of India on whose land the hotel stands. The CAG has observed that although J.P. Morgan increased the revised "base value" of the property to Rs.92 crores, the Evaluation Committee fixed the reserve price at Rs.78.30 crores - implying a loss of Rs.13.70 crores for Air-India.

More curiously, despite the substantial revision in the terms of the offer, fresh bids were not invited. Instead, only the four Qualified Interested Parties from the earlier round were informed about the changed terms. The A.L. Batra Group was again the sole bidder in the second round.

Sanjay Nirupam told Frontline that he had been consistently demanding an investigation by the Central Bureau of Investigation (CBI). He said that "national assets have been sold to favoured persons", and that "this is the very definition of corruption". He alleged that Batra had been favoured because of his close links with the Rashtriya Swayamsewak Sangh (RSS). Nirupam has also demanded a thorough probe into the sale of several hotels belonging to the India Tourism Development Corporation (ITDC).

The case of Juhu Centaur is also a curious one. The role of Ajit B. Kerkar, the promoter of Tulip Hospitality Services, its eventual buyer, has repeatedly figured in the discussions in Parliament. On May 4 this year, in response to members’ queries in the Lok Sabha, Chidambaram confirmed that Ajit Kerkar was a member of the Air-India Board on November 3, 1998, when it established a sub-committee. On November 10, 1998, the sub-committee, which included Kerkar, decided to disinvest Air-India’s stake in the HCI. The following day the Air-India Board was reconstituted with Kerkar making an exit. Members cutting across party lines wondered as to how a seller turned into a buyer.

Three more substantial issues have arisen in the case of Juhu Centaur. First, there have been allegations that the final reserve price fixed was lower than that suggested by the valuer appointed by Air-India. Secondly, MPs have repeatedly asked how the NDA government allowed Tulip to delay payment. Thirdly, there has been a controversy over Arun Shourie’s meeting with the bankers funding the acquisition.

On May 4, Chidambaram told the Lok Sabha that the valuer’s report indicated a value ranging from Rs.214.14 crores to Rs.246.50 crores, depending on the valuation method adopted. Chidambaram also said that J.P. Morgan "adjusted" the value to arrive at a figure of Rs.134 crores as the reserve price. However, the Evaluation Committee, which considered the issue, recommended a reserve price of Rs.101.60 crores. Tulip’s bid of Rs.153 crores was accepted.

Shourie’s role in the Juhu Centaur case has attracted controversy primarily because of the "active interest" he took to consummate the sale. Tulip sought and obtained a series of extensions. Documents available with Frontline show that three officials of the HCI and Air-India from Mumbai travelled to Delhi on February 22, 2002, to encash the bank guarantee furnished by Tulip because it had failed to close the deal in time. These officials remarked in an internal office memo that they returned empty-handed because senior officials in the Disinvestment Ministry asked them not to encash the bank guarantee. On February 23, 2002, Arun Shourie participated in a meeting in which the bankers funding the transaction, the bidder and his associates, and the then Disinvestment Secretary Pradeep Baijal, among others, participated. Chidambaram informed the Lok Sabha that this meeting was sought by Tulip "to demonstrate (its) intent to complete the transaction". The seven participating banks agreed to provide Rs.129 crores, implying that Tulip furnished the remaining Rs.24 crores from its own funds.

Recent reports indicate that Tulip Hospitality is engaged in efforts to sell the property to another private group, apparently for a consideration of Rs.370 crores. However, Vijaya Bank, which extended a term loan to Tulip for the acquisition, has opposed the resale attempt. It has issued a cautionary notice in newspapers asking members of the public not to deal with assets under its charge. Meanwhile, the hotel has been closed for over two months.

Chidambaram told the Lok Sabha that Tulip Hospitality Services reported losses amounting to Rs.35 crores in 2002-2003 and Rs.36 crores in 2003-04. He also said that its loans to banks had turned `non-performing’ since November 2002, barely six months after it acquired Juhu Centaur. Of the 801 employees of the hotel, 593 have lost their jobs since the sale.

Speaking to Frontline, Dipankar Mukherjee said that several questions about the sale of the two hotels remained unanswered. This, he said, could only be unearthed by a CBI probe. He pointed out that both cases were single-bidder transactions. Moreover, in both cases the successful buyer had not shown any interest in actually running the hotels but was keen on passing on the assets to other companies for a premium. He pointed out that the bidders may have been "fronts" for others interested in the assets.

Dipankar Mukherjee also finds fault with Shourie for participating in a meeting of the bidder with its bankers. Referring to Shourie’s defence that he attended the meeting only to ensure that the sale was finalised soon, Dipankar Mukherjee said: "Why was the financial soundness of the bidder not checked before finalising the deal? Do you require a Minister to call senior bank officers to enquire about the credibility of the bidder? A letter of comfort from the bank should have been forthcoming." He also alleged that nobody from the Ministry of Finance was present at the meeting.

Addressing a calling attention motion in the Rajya Sabha on August 18, 2004, Chidambaram said his "discomfort" arose out of the NDA government’s eagerness to pursue single-bidder transactions. "Prudence dictates that you do not pursue a single-bidder transaction. Driven by the zeal for disinvestment, they (the NDA government) overlooked the fact that it was not prudent to do so," he said.

With inputs from Siddharth Narrain

See online : Frontline


Volume 22 - Issue 11, May 21 - Jun. 03, 2005

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