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Raghuvir Srinivasan

WHAT is happening at BSES? Since February last, when the Reliance group acquired majority control, there have been some interesting changes in the company. The latest is the "de-subsidiarisation" of nine of its subsidiaries, announced to the stock exchanges last week. For those wondering what the term means, it is that BSES is selling off either part or whole of its stakes in these nine companies so that they cease to be its subsidiaries.

Why is BSES doing this? No explanation from the company, except that it is "part of a restructuring exercise". From when will it be effective? March 29, 2003. This means that these companies will not be part of the consolidated financial statement of BSES for 2002-03. Who is buying the stakes in these companies divested by BSES now? Not known. Which are these nine subsidiaries? They are BSES Andhra Power which runs a 220 MW gas-based project in Andhra Pradesh; the troubled BSES Kerala Power which operates a 165 MW gas-based plant in Kerala; BSES Rajdhani Power and BSES Yamuna Power, newly incorporated for the Delhi distribution business; Tamil Nadu Industries Captive Power Company, which is executing a 250 MW lignite-based project in Tamil Nadu; BSES Telecom and three distribution subsidiaries in Orissa.

BSES holds substantial stakes of about 83 per cent in the AP and Kerala companies, 67 per cent in the Tamil Nadu one and 100 per cent in the telecom company. It is a 51 per cent owner in the Orissa distribution companies. BSES will sell enough equity to bring down its holdings in these companies below the critical 51 per cent level so that it will not have to incorporate their performance figures in its balance-sheet. Considering that these companies are in its own business of power, it is unlikely that the stakes will be sold to an outsider. Chances are that some unlisted special purpose vehicles will be floated to buy the stakes being offloaded.

Now, for the reason for the "de-subsidiarisation". These companies are either making losses or are still in the project implementation mode, which means that they are a drag on BSES. For instance, in 2001-02, the Kerala subsidiary posted a loss of Rs 3.36 crore while BSES Telecom's loss was higher at Rs 5.89 crore. The Orissa distribution companies have large accumulated losses and their accounts are still being finalised. The two Delhi distribution subsidiaries have acquired the business only in May 2002 and are quite a way from making profits.

Obviously, the red ink flowing from these companies is not a pretty sight on the BSES balance-sheet. Remember, BSES is itself not in the best of health. Its return on capital employed (ROCE) has been going downhill over the last few years; from 18 per cent in 1998-99 to 12.89 per cent in 2001-02. In recent times, its earnings have been falling consistently in the last four quarters and in the latest one ended December 31, 2002, they fell by a huge 83 per cent. The losses from the subsidiaries are certainly not going to help BSES in this context.

Yet, all this does not still answer the question of why BSES is being dressed up now? To answer that, we have to go back to another of its interesting moves; this happened soon after Reliance acquired control over the company in February. At an extraordinary general meeting, BSES passed two significant resolutions. The first was to empower the board to mortgage its assets to raise funds. The second, and more interesting one, was an amendment in its memorandum permitting BSES to enter the businesses of setting up infrastructure facilities including port terminals, pipelines for carrying petroleum products and natural gas, telecom services and manufacture of telecom equipment, agriculture, health services, film and entertainment and mining and real estate.

The "de-subsidiarisation" now has to be seen in the above context. It is no accident that the Reliance group is in businesses related to those that BSES now proposes to enter. The Reliance group now needs to raise massive capital for its foray into telecom and to set up a marketing chain along with retail outlets for its output of petroleum products. It is certainly not coincidental that BSES is an under-leveraged company with a debt-equity ratio of just 0.24 and shareholder funds in excess of Rs 2,500 crore which can be leveraged upon. With its established track record, BSES can be a useful vehicle to raise the much-needed funds for the Reliance group. Meanwhile, the transfer of 5.66 per cent equity of BSES held by Reliance Power Ventures, the company responsible for the group's foray into power, seems to indicate the possibility of the two companies merging in the near future. Clearly, the changes that are now happening in BSES appear to be just the beginning.

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