Humungous land assets a major hurdle in the PSU privatisation process

Large land holdings with public sector companies can scare off potential investors, who have to deal not only with issues about pricing of the land, but also about ownership rights

How many commercial buildings in Delhi name themselves as Jeevan something? There are seven of those, just a few among the large posse of buildings and land assets held by LIC, India’s largest financial sector company that the government plans to list in FY22. 

LIC's land holdings are so vast, that in the valuation exercise of the company, it was decided to estimate those separately. The other two of LIC’s assets being estimated are an actuarial valuation of its life insurance business, and the percentage of the Indian capital market it holds in its vaults. These are gargantuan exercises. 

Less famous, but with impressive land assets, is another company headed for privatisation, again in FY22. This is Container Corporation of India (Concor), India’s largest logistics company, which operates under the ministry of railways. In a country obsessed with land, how their land parcels are valued could certainly dominate news bytes and consequently popular imagination. The government of India has good reason to figure out the size of land and buildings LIC holds. LIC’s book are of no use to estimate their value since they have been written as per historical acquisition costs. For instance, the annual report FY19 of the corporation apportions the total freehold and leasehold land held as just Rs 181.94 crore. The buildings are valued at just Rs 2,424.13 crore. They will not cover the value of LIC’s real estate assets in just Delhi. And LIC is the biggest landlord in many of the metros and other major cities of India. 

In fact the far smaller land holdings of Concor have a higher valuation in its books, at Rs 576.79 crore as on March 31, 2019. That too is at book value. These areas are at terminals, adjacent to ports surrounding metros, so the reckon able value is far higher. The company is the undisputed logistics leader with the largest available network of “state-of-the-art” intermodal terminals across the country at almost all container handling ports.  

While many of the land parcels the company did were held on lease from the Railways, its own holdings, as expected, are also considerable. Concor returned 15 such parcels because of a change made by the Railways for charging Land License Fee at the rate of six per cent of the value of land. It was a stiff blow from the ad hoc arrangements practised till recently. The Railways had never made any valuation of the land it gave to its own ministry's public sector unit. The company acknowledged that the change brought in now, “will have a significant impact on the Company’s financials and the same has been suitably represented to the Railways”. It has raised the firm’s annual payout to about Rs 450 crore from Rs 140 crore in just one year. It is expected to rise even more.  

Land as a challenge:

The share price of Hemisphere Properties has been tanking ever since it listed on October 22 last year at Rs 100.70. On Tuesday it had barely climbed to Rs 116.70. It sits on a land bank of 739.69 acres in Delhi, Pune and Kolkata. The holding is a relic and a reminder of what land holdings could do to a company when it goes for privatisation. Government-owned telecom company VSNL was sold to the Tata Group in 2002. While the telecom business was sold, the surplus land with VSNL (renamed Tata Communications) was supposed to be valued separately and not be part of the sale. It sounds simple enough, but it has taken 18 years to untangle the knot. The land was finally demerged from Tata Communications, and clubbed under a new company, Hemisphere Properties. But even now, according to company chairman D Thara, it will need a Rs 751-crore loan from the government to pay for the stamp duty on transfer of title of the land it has been given. Only then shall the land be of any use. 

Hemisphere is the most stark example of how land holdings with public sector companies can scare off potential investors. For those who do as the Tatas did, there often seems to be no end. Air India’s headquarters in Mumbai has had to be prized out of the disinvestment plan, for instance. Wiser after the VSNL experience, no bidder for the airline wanted it. 

There are not only issues about the pricing of the land, but also about ownership rights. As the Hemisphere case shows, the land titles on which many of these companies stand are not clear. The owner of Ashok Hotel in Delhi, ITDC for instance, is now planning to lease out the hotel in central Delhi and a plot of 22 acre land besides it for developing a market complex and service apartments. This comes after decades of problems with the title to the land on which the hotel stands. Other than security issues, this held  up any move to sell the hotel. A market complex and apartment shall bypass questions on land ownership rights, since those occupying them shall effectively be tenants.

Concor faces the same challenge. Even if the Railways and the company work out a new land license fee, the challenge will be to work out the term for which it will remain valid. That it shall come so close to the privatisation makes the decision fraught. A news report says the divestment of the company has been pushed back to the next financial year because of this delay in finalising a policy on fee for using Railways' land.

The government has, of course, become wiser over the years. In early 2020, Dharmendra Pradhan, petroleum and natural gas minister, told Parliament that surplus land of public sector units would be sold at commercial rates to states or any private party, parallel with the disinvestment. A Business Standard report this month noted the government has asked MSTC, the governments’ own e-auction platform to set up a bidding platform for auctioning non-core assets of public sector companies, principally land. “The platform will work as a one-stop shop for those keen on acquiring properties and land assets of PSUs”, the report added.

Land is, however, core for both Concor and LIC. For any bidder for Concor the land at the various terminals where it operates is essential holding for business purposes. Which means the logistics company may soon have to renegotiate with the Railways for getting back the leased premises it has surrendered. Hiring spaces for its 40,000-odd containers at new rates could cripple the company, as ports too are expected to raise their leasing charges like the railways. Just before Covid struck, between the major ports the government had almost finalised a policy to lease out around 9000 acres of port land in Mumbai, Kolkata & Gujarat to private companies.

LIC, in any case, is not up for privatisation. Only a fraction of its shares will be listed in the markets. The rental income from its properties is also puny at Rs 338.18 crore. Yet the government has thought it prudent to value its real estate holdings separately. It was not necessary, since a going concerns’ total share value could have been estimated with far less hassle. Estimating the land and buildings held by LIC is a pointer that if in future the government were to put up the company for sale, it shall have to be sans the iconic buildings of the corporation. Letting them go could prove difficult. None more so than the glass fronted Jeevan Bharti building in Central Delhi.