KAAND: The Privatisation Kaand TACTIC: Buy a public asset for less than it's worth when the government needs cash and valuations are conveniently depressed
THE TACTIC IN ONE PARAGRAPH When a government is desperate for revenue—whether due to fiscal deficits, debt repayments, or political pressure to show "efficiency"—it may sell state-owned assets at fire-sale prices. The tactic relies on three conditions: the asset’s valuation is artificially depressed (through regulatory delays, policy uncertainty, or engineered distress), the buyer has advance knowledge of the sale (or influences its timing), and the transaction is structured to avoid public scrutiny. The buyer acquires a valuable asset—land, infrastructure, or a profitable enterprise—at a fraction of its intrinsic worth, often with deferred payments, sweetheart loans, or tax breaks. The government gets immediate cash, the buyer gets long-term upside, and the public bears the cost of undervaluation. The key is not just the sale itself, but the orchestration of circumstances that make the asset appear worthless until the right buyer steps in.
HOW IT WORKS IN INDIA SPECIFICALLY This tactic thrives in India due to a combination of institutional gaps, regulatory arbitrage, and political incentives. First, the government’s fiscal dependence on disinvestment targets creates artificial urgency—when revenue falls short, assets are sold not for strategic reasons but to plug budget holes. Second, the valuation process is opaque: the Department of Investment and Public Asset Management (DIPAM) relies on merchant bankers (often conflicted) to determine fair value, while the Comptroller and Auditor General (CAG) lacks real-time oversight. Third, the Insolvency and Bankruptcy Code (IBC) has become a backdoor for such deals—public sector banks (PSBs), under pressure to clean balance sheets, sell stressed assets to connected buyers at steep discounts, with the government later blessing the transaction as "privatisation."
The legal framework further enables this. The Securities and Exchange Board of India (SEBI) regulates listed entities, but unlisted public sector undertakings (PSUs) fall under the Companies Act, where disclosure norms are weaker. The gap between RBI’s oversight of banks (which lend to buyers) and SEBI’s oversight of listed targets creates room for round-tripping—where the same group that stripped an asset later buys it back at a discount. Finally, the judiciary’s slow pace ensures that challenges to such sales (by unions, minority shareholders, or whistleblowers) drag on until the deal is a fait accompli. The system is designed to move fast when the government wants to sell, and slow when it wants to investigate.
THE HISTORICAL RECORD The most documented instance is the sale of Modern Food Industries (India) Ltd. in 2000. The government, under pressure to meet disinvestment targets, sold the profitable bread manufacturer to Hindustan Lever Limited (HLL) for ₹106 crore. The valuation was based on a single merchant banker’s report, which ignored Modern Food’s 60% market share in institutional bread sales, its 14 factories, and its land bank. Within a year, HLL sold just one of these factories for ₹160 crore—more than the entire acquisition price. The CAG later noted that the government had undervalued the company by at least ₹300 crore. The sale was challenged in court, but by the time the case was heard, Modern Food had been dismantled, its workforce retrenched, and its assets liquidated.
Another case is the sale of Centaur Hotel (Mumbai) in 2002. The hotel, owned by the now-defunct Air India, was sold to Batra Hospitality for ₹83 crore—despite an independent valuation of ₹115 crore and a competing bid of ₹110 crore. The sale was structured as a "strategic disinvestment," but the CAG found that the buyer had defaulted on payments, and the hotel was later resold for ₹350 crore. The original sale was annulled by the Supreme Court in 2006, but by then, the asset had changed hands multiple times, and the government recovered only a fraction of its value.
More recently, the privatisation of Air India in 2021 followed a similar playbook. The airline was sold to the Tata Group for ₹18,000 crore, but the government absorbed ₹60,000 crore of its debt before the sale. The valuation was based on a "base price" set by the government, not an independent assessment. Critics argued that the airline’s slots at Heathrow, its brand value, and its real estate were undervalued. The deal was cleared in record time, with minimal scrutiny of the buyer’s post-acquisition plans.
THE INSTITUTIONS THAT ENABLED IT No tactic works in isolation. In these cases, merchant bankers (like JM Financial, SBI Caps, and ICICI Securities) provided valuations that justified the sale price, often ignoring intangible assets like brand value or land appreciation. Public sector banks, under pressure from the finance ministry to "support disinvestment," extended loans to buyers without adequate collateral. Rating agencies (CRISIL, ICRA) gave investment-grade ratings to the debt instruments used in these deals, despite the underlying assets being undervalued.
The CAG, while later flagging irregularities, has no power to stop sales—its reports are tabled in Parliament months or years after the fact. The judiciary, when petitioned, has often ruled in favor of "government policy" over due process. For instance, in the Centaur Hotel case, the Supreme Court annulled the sale but could not reverse the asset stripping that had already occurred. The media, dependent on government advertising, rarely investigates these deals in real time. And the boards of PSUs, packed with bureaucrats on short tenures, have little incentive to question the government’s valuation.
THE CURRENT STATE The tactic remains alive and well. The government’s push for "asset monetisation" (leasing public infrastructure to private players) and the privatisation of PSUs like BEML, Shipping Corporation of India, and NINL follows the same playbook: set a low base price, limit competition, and structure the deal to favor insiders. The IBC has become the new frontier—stressed assets are sold to connected buyers at 20-30% of book value, with banks taking haircuts and the government later justifying the sale as "market-driven." The only change is the branding: what was once called "disinvestment" is now called "strategic sale" or "monetisation," but the mechanics remain the same.
WHAT TO WATCH FOR First, sudden regulatory hurdles that depress an asset’s valuation—like delayed environmental clearances for a PSU’s land, or a sudden tax demand that erodes its profitability. Second, last-minute changes in sale terms—such as shifting from an open auction to a "strategic sale" with a single bidder, or allowing deferred payments with minimal upfront cash. Third, post-sale asset stripping—if the buyer immediately sells off the most valuable parts of the acquired entity (land, brands, or intellectual property), it’s a sign the acquisition was never about long-term value.
This newsletter describes documented business tactics and systemic patterns based on public records, regulatory orders, and published financial journalism. It does not make allegations against any individual or entity. Readers are encouraged to consult primary sources and form their own conclusions.