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Line in the sand

21 Aug 2012 By Jeff Glekin

India’s national auditor has once again highlighted the too cheap sales of state assets. Going forward, the answer is simple. But the burden of history will not be removed easily.

The latest salvo from the auditor suggests that both coal mines and land were sold for around $37 billion less than they were worth. Following a scandal over the “underselling” of 2G telecom licenses, the supreme court of India ruled that it was unconstitutional for the government to sell assets on a first come-first serve basis. They put into law that the government should always seek to maximise profit through auctions. Such sales shouldn’t be too hard to arrange.

The past is more complicated. Too many valuable assets have been flogged on the cheap.

But bad sales are not all alike. It is just and politically appropriate to try to reverse corrupt sales to cronies, a fair description of the 2G license sales. The coal sales were probably transparent transactions which happen to have been badly structured by the government, to the benefit of legitimate businesses. For such transactions, the ethical and policy questions are more delicate.

Still, the underselling was so stark – the government gave the coal blocks away to the companies instead of extracting the fair price of $33 billion – that the windfalls look too large to just let pass. In the case of the land for Delhi airport it estimates that it was sold at a tenth of its market value, giving the developers an undue profit of $4.3 billion. Also, the legal basis of those sales is also in question, since the supreme court’s ruling is also retrospective.

Still, a long legal wrangle would be bad for the Indian economy. An amicable agreement would be far preferable. One way forward might be for the government and the companies to agree to an arbitrator’s review of the underselling. Buyers could choose between accepting the arbitrator’s judgment or selling the assets back to the government at the price they paid, plus interest.

Such a process would have three benefits. It could raise much needed cash for the treasury. It would give industry legal certainty about their assets. And it would draw a line under the era of crony capitalism.


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