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Author Topic: Exercise VII: Privatization of VSNL in 2002 and the effect on firm performance  (Read 2207 times)

Offline mamro

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Videsh Sanchar Nigram Limited (VSNL), today TATA Communication Limited, is one of India’s largest telecom companies. In 1991, after the breakdown of its socialist regime, the Government of India initiated a wave of economic reforms to gradually privatize its economy. Within this framework, the state-owned VSNL was partially privatized, which, as suggested by recent academic literature on firm privatization, led to an improvement in its performance reflected in the stock price.

However, what were the effects on firm performance after the Government of India sold the majority of its shares and VSNL’s management were substituted by decision makers of the new majority owner TATA Group? VSNL was the first Indian firm to be listed at an American stock exchange. Further, before being privatized, VSNL enjoyed a position with considerable market power in the Indian economy, so one could have expected share prices to further increase in response to the privatization. However, the government’s economic reforms induced an increase in competition (even two years prior to the planned date). Thus, VSNL lost a large part of its market share in International Long Distance (ILD) connections, its actual core product, and suffered from the resulting price decrease.

As a consequence, management at VSNL re-engineered its business model, increased its operations on international markets and even acquired the U.S. enterprise Tyco; activities which were reflected in overall increasing stock prices till 2009.