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Supreme Court orders CBI probe into Hindustan Zinc disinvestment of 2002

A bench of Justices DY Chandrachud and BV Nagarathna also held that summary disposal of an earlier petition under Article 32 of the constitution does not bar the present writ petition on grounds of res judicata as there has been no substantive decision on the merits of the issues.

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The Supreme Court today passed orders for a full-fledged CBI investigation into the 2002 disinvestment of Hindustan Zinc Ltd (HZL) allegedly at a very low price after which Vedanta group company Sterlite took management control of HZL. However, the Supreme Court said the present government can disinvest the remaining 29.5 percent of its residual shareholding in HZL.  

The Court has noted, “The decision in the “Centre for Public Interest Litigation” cannot apply to the present facts because HZL had ceased to be a government company, at the stage of the disinvestment which is in the challenge.” 

The court must live to interpret principles of res judicata: Supreme Court

A bench of Justices D.Y. Chandrachud and B.V. Nagarathna also held that summary disposal of an earlier petition under Article 32 of the constitution does not bar the present writ petition on grounds of res judicata as there has been no substantive decision on the merits of the issues. 

Res Judicata 

The Court has observed,

“With regard to the issue of Res Judicata, this held that the three-judge Bench judgment of this Court- Maton Mines Mazdoor Singh, being relied on by The Union Government and SOVL was rejected in limine, without a substantive adjudication on the merits of their claim.”

“Thus the argument that the reliefs sought by the petitioners are similar to the abovementioned case, where they challenged the disinvestment of 2002 and 2014, on the basis of the decision in Centre for Public Interest Litigation, were not accepted by this court,” it stated. 

Justices Chandrachud and Nagarathna observed,

“The Court must be conscious that grave issues of public interest are not lost in the woods merely because a petition was initially filed and dismissed, without a substantial adjudication on merits. While criticizing the trend of poorly pleaded public interest litigations being filed instantly following disclosure in the media, they observed that interpretation of the principles of res judicata or constructive res judicata should be in a manner that does not debar access to justice.”

Finally, the Bench held that the present writ petition is not barred by res judicata.

Preliminary Inquiry

After considering the recommendations of the CBI official, various reports and recommendations this court was satisfied that a prima facie case for a cognizable offense, as mandated in para 9.1 of the CBI Manual, has been made out in this case and warrants the registration of a regular case. Therefore the court decided to use its exceptional powers to direct the CBI to conduct an investigation into the matter. The court held that the disinvestment in 2002 exhibits prima facie, for registration of a regular case followed by a full-fledged investigation. Furthermore, the Court directed that it shall be duly apprised of the status of the investigation.

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Following are CBI officials’ recommendations which were not adequately addressed by the self-contained note closing the preliminary enquiry;

A. Irregularities in the decision to disinvest 26 per cent, instead of 25 per cent

The sixth report of the Disinvestment Commission (1997) categorized HZL as a “non-core PSU” and recommended disinvestment not beyond 25 per cent of the equity, in order to retain control. The Government’s share at the time was 75.92 per cent.

Cabinet Committee had accepted the same. However, the Core Group of Secretaries on Disinvestment allegedly disregarded this recommendation and proposed a sale of 26 per cent, without any justification. Despite being informed of the Ministry of Mines’ objection to seeking the approval of the Cabinet Committee of Disinvestment for transfer of management control to a strategic partner, the Cabinet Committee of Disinvestment approved the proposal. This was allegedly done on the basis of a senior government official’s note dated 27 August 2000, without further details or reasoning. This further reduced the Union Government’s share in HZL to 49.92 per cent.

B. Irregularities in the bidding process

The advertisement dated 4 December 2000 did not mention that a road-map for a complete sale of the company had been decided. During the first bidding in 2001, the reserve price was at Rs. 35.90 per share. Out of the six qualified bidders, bid of SOVL was received for Rs 29.22 per share much below the original reserve price. 

Furthermore, recommendations of the Evaluation Committee for delaying of the tender process until the global markets stabilized was initially accepted, but rejected the very next day without furnishing any reasons. Again in March 2002, bids were invited, with the reserve price to Rs 32.15 per share without any justification. 

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Again the sale was made to SOVL at Rs 40.51 per share, totalling to Rs 445 crores (approx.) in spite of an alleged adverse SEBI order which disqualified SOVL from participation. Bids by only two bidders were accepted whereas at least three bidders were required to process the matter. Moreover, recommendations  of The Ministry of Law the removal of the mandatory obligations in the Shareholders’ Agreement and the Share Purchase Agreement with SOVL disregarded without any justifications. The Comptroller and Auditor General’s Report 17 of 2006 indicated the assets of the company were not valued properly. Subsequent sale of 18.92 per cent equity to SOVL in 2002 at the old rate of Rs 40.51 per share, was not in line with the Share Purchase Agreement, as the prevailing rate then was Rs 119.10 per share, resulting in a loss of about Rs 650 crores.

C. Irregularities in the valuation of 26 per cent equity for disinvestment

The officials representing M/s BNP Paribas the ‘Global Advisor’ appointed on 9 January 2002 couldn’t be traced by CBI. It was found to be a bank based in France and the erstwhile company M/s BNP Paribas Equities India Pvt. Ltd. had undergone voluntary liquidation on 5 September 2001. Furthermore, the bank was denying the details of the company and its existence. The officials of this company did not use the ‘asset valuation method’, in case of a strategic sale despite being  recommended by the  Disinvestment Commission. An ‘Asset Valuer’ for the valuation of the fixed assets was appointed without issuing a competitive/ limited bidding advertisement. Such private valuer did not possess the requisite expertise. They allegedly failed to consider goodwill, technical know-how and various assets of HZL. These experts had opined that the valuation was on the lower side, without including relevant mining properties. The absence of any mining engineer or geologist in the team was also not understandable. Allegedly, if the valuation had been conducted properly, on the basis of DCF method, the value would have been over Rs 1000 per share.

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