PA government caught on the wrong foot with sale of stake in Gangavaram port

Andhra Pradesh Chief Minister YS Jagan Mohan Reddy, who told Prime Minister Narendra Modi to refrain from privatizing the Visakhapatnam steel plant, was taken on the wrong foot during a divestment deal in its own state.

On May 4, the PA cabinet, led by Jagan, backed a proposal from Adani Ports and Special Economic Zone Ltd (APSEZ) to buy the state-owned 10.4% stake in Gangavaram Port Ltd (GPL) and authorize the merger of GPL. with APSEZ.

APSEZ’s decision came after the acquisition of 31.5% stake in Windy Lakeside Investment Limited (a subsidiary of private equity firm Warburg Pincus LLC), followed by the purchase of the stake in 58, 1% owned by DVS Raju and his family, the promoters of Gangavaram Port, both for ₹ 120 per share.

Resolution adopted

On May 21, the PA Assembly even passed a resolution opposing the Centre’s decision on the strategic divestment of 100% of the stake in the Visakhapatnam steel plant, seen as a symbol of pride of the ‘Andhra, and urged the Center to abandon the plan.

The proposal submitted by APSEZ is to buy the government stake in the PA at ₹ 120 per share resulting in consideration of ₹ 645.10 crore or to receive shares of APSEZ valued at ₹ 645, ₹ 10 crore as a result of proposed merger between GPL and APSEZ.

Gangavaram Port: Adani Ports to buy 58.1% stake from developers for over ₹ 3,600 crore

APSEZ’s proposal to buy the stake at ₹ 120 per share (the price at which it acquired the stakes in Windy and DVS Raju) may not be an “acceptable valuation” for the state’s shares, officials said. sources.

The PA government took the 10.4 percent stake, not by putting money in, but instead of the 1,800 acres of land acquired for the port in 2003, which at the time was valued at 54 crore ₹.

Instead of leasing the land for the port project, it was transferred to the port developer “as a government investment towards a 10.4 percent stake in GPL,” according to a government order.

Land value

In the current market, the value of this land is over ₹ 3,000 crore. Thus, the value of the stake will be much higher than the ₹ 120 per share that ASEZ paid to the other two shareholders.

The AP government’s lack of policy on divestment, especially in for-profit companies, has cast doubt on the Cabinet’s decision to sell the stake in Gangavaram port.

The Cabinet’s approval of the APSEZ proposal and the subsequent May 25 government decision also raises some key questions.

After coming to power in 2019, Jagan implemented a reverse tendering process for government contracts over ₹ 100 crore, which was praised for its cost saving benefits. The reverse tender will be dealt with through a judicial mechanism, for which a retired High Court judge has been appointed.

Reverse tender

Under this mechanism, once the bids are received, the process will again be subject to a reverse bidding process for which a minimum of two bids is required in the first round.

PA government nods for change of ownership of Gangavaram port

The AP Firm accepted the recommendations of SBI Capital Markets Ltd which was hired by AP Maritime Board (APMB) to assess APSEZ’s proposal.

SBI Caps recommended that “the PA government should proceed with the divestment in accordance with the GoI (central government) divestment policy guidelines for better price discovery and negotiations,” the May 25 ordinance revealed.

“SBI Caps has made it clear that divestment through direct sales is the best option available to the state,” the order says.

“The government, while taking into account the recommendations of SBI Caps, has decided that the whole process of divestment and merger could be implemented through a group of authorized secretaries, duly following the guidelines available. in this regard and the advice of the finance department, ”he added.

The responsibility for overseeing the Gangavaram divestment deal (which is worth more than ₹ 100 crore) now rests with the panel of secretaries, including going through the state’s reverse tendering process or granting an exemption. to sell the stake directly to APSEZ and monitor central government divestment. Politics.

The second issue is the need to divest its stake in GPL, a for-profit, debt-free entity, which has started giving the state government dividends of up to ₹ 83.27 crore (total) since 2016- 2017. Dividend receipts will cease after divestment.

But, more importantly, how would the state government justify selling the stake, which is expected to bring in ₹ 650-700 crore, when the value of the underlying land against which the stake is held is itself worth? over ₹ 3000 crore in the absence of a policy?

Register Adani Group Gangavaram Port: CPM

The state government states that increasing land values ​​must be seen in the context of use. “In this case, the land can only be used for harbor and port-related works and not for anything else,” said an official with the PA Maritime Council (APMB).

The head of the APMB also said he did not agree to APSEZ’s proposal to value its 5,37,31,700 shares (10.4% stake) at ₹ 120 per share. “We haven’t decided on the rate. We will find out the course of action through proper and due process, ”he said.

SBI Caps had suggested setting the price 20 percent above ₹ 120 per share.

“We will definitely try to get a higher value based on a formula,” he said.

Divestment policy

By aligning with the central government’s divestment policy, the state was “monetizing” its stake in the port, he said. “Ironically, otherwise, the state will have to pay the port developer for the 10.4 percent stake when the port’s assets return to the government at a predetermined valuation at the end of the concession period,” the official noted. the APMB.

The third issue concerns the need to merge Gangavaram Port Ltd with APSEZ and the establishment of a new Special Purpose Company (SPC) by APSEZ to sign a revised concession agreement with the state government for the balance sheet period after the exit from the GPL by the State. The new deal will incorporate all of the terms of the original deal, including sharing 2.1% of annual revenue with the state, which has brought ₹ 183.56 crore to the Treasury since 2009-10.

Gangavaram Port has an initial concession period of 30 years, which can be extended twice by 10 years each.

The state government benefits from the merger are unclear, sources said.

Such a merger was not deemed necessary by APSEZ when it recently acquired 100% control of Krishnapatnam Port Co Ltd (KPCL). Also in this case, the land was acquired by the state government, but was leased to KPCL for the duration of the 30-year concession contract, which can be extended by two periods of 10 years each. As the land was leased, the state government did not hold any shares in KPCL.

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