The Telegraph
Since 1st March, 1999
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Market value to guide selloff
- Row over Centaur, Balco sale prompts valuation rule revamp

New Delhi, July 17: The government has decided to change the valuation norms for public sector undertakings that are likely to be divested. This comes on the back of reports from auditors hinting at significant under-valuation of Mumbai’s Centaur Hotels and Balco.

The government will undertake a market valuation of firms in which it plans to sell stakes instead of measuring their worth through the discounted-flow (DCF) method. “The preference for the DCF methodology has been a cause for concern as it is based on a number of assumptions, which throw up a range of options. By contrast, the market-value mode is grounded deeper in reality,” the finance ministry has said in a note on disinvestment.

The Comptroller and Auditor-General of India had pointed out that out of a range of possible prices, the government chose to fix Centaur Airport’s reserve price at Rs 78.3 crore ' the lower end of the valuation range.

Batra Hospitality had to pay only Rs 83 crore for the hotel, which was resold to the Sahara Group for Rs 115 crore. The government is probing the deal.

The Congress and Left parties have demanded an inquiry into the sale of Balco and Jessop.

According to the finance ministry note, the government will have to take into account four methods for divesting PSU shares or assets ' market valuation, discounted flows, price of comparable companies and book value. “The market valuation method is easy to comprehend. It should at least be given a status equal to other valuation methodologies.”

The highest valuation among the four methods will be accepted. As market-based calculation usually results in the highest value, this will become the obvious way of determining the price at which the PSU asset is sold.

In case the highest value is not accepted for some reason, the evaluation committee will have to specifically “record explicit reasons for its decision”.

The new method has been a favourite with Congress and Left leaders. When Balco was sold for Rs 550 crore, Congress leader Kapil Sibal had contended in Parliament that the aluminium giant’s value through the market determined asset valuation method should have been close to Rs 3,000 crore.

The government has also decided to do avoid controversies over surplus assets of public sector companies being put on the block. It wants a detailed audit to identify core and surplus assets, along with their valuation.

On this basis, the government would take a view of the cost and benefit of a “bundled sale” (of both core and surplus assets) or a separate sale of surplus assets.

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