The New Delhi Municipal Council (NDMC) has failed to auction the city’s landmark Taj Mahal Hotel aka Taj Mansingh, whose lease to the Tata Group expired in 2010. The Tata Group’s hospitality arm Indian Hotels Company Ltd, that has been running the iconic hotel at No 1, Mansingh Road for nearly four decades, has been resisting an auction.
The municipal council was inclined to extend the lease on renewed terms but the urban development and home ministries advised an auction instead. Here is why Taj Mansingh has failed to attract investors.
What’s the Fuss About?
The Tatas are very attached to the 3.78 acre property in leafy Lutyens Delhi. They made it an iconic address after securing a lease for 33 years, which commenced with the first paid occupancy on 10 October 1978. At a ‘coming out’ party the following year, the noted French fashion designer Yves Saint Laurent introduced the hotel before a global audience. The 292-room hotel was the third five-star hotel in Delhi after the Oberoi Intercontinental and The Ashoka.
Despite the Taj Mansingh’s stature, in recent visits to Delhi, eminent figures like British Prime Minister Theresa May, Sri Lankan PM Ranil Wickremesinghe, PM Lee Hsien Loong of Singapore; Chairman, President and CEO of JP Morgan Chase, Jamie Dimon; German Chancellor Angela Merkel, and Linkedin Global CEO Jeff Weinder – have chosen to stay at another Taj property – The Taj Palace Hotel.
Taj Mansingh's Sanjay Gandhi-Connection
Those were the days of the Emergency and the then Prime Minister Mrs Indira Gandhi’s son, Sanjay, had the last word in official matters. Editor and food columnist Vir Sanghvi wrote in a 2016 article in The Hindustan Times, that it was Sanjay Gandhi who blessed the deal.
As per the HT article, Ajit Kerkar, who built the Taj hotel chain, had got a lease for Fonseca’s – a 32-room hotel that stood at the address ie No 1 Mansingh Road, after its owner, a nawab, had moved to Pakistan in 1947. But municipal officials would not let him raze the property and build another in its place. A rival hotel was suspected to be egging them on. Kerkar reportedly got Rukshana Sultana, a socialite and friend of Sanjay Gandhi to intercede. She owned a jewellery shop at Fort Aguada, a Taj hotel in Goa.
Tata Group's Tactics to Retain Taj Mansingh
The Tatas have tried various tactics to retain their hold on Taj Mahal Hotel in New Delhi. They claimed before the courts that it was a one-of-a kind public-private partnership (PPP) in which the municipal council had contributed Rs 6.26 cr in land and building, but they had flattered it. Their investment over the lease period was Rs 129 cr, or 21 times more than that of the municipal council. They had also paid Rs 400 cr in license fees.
So when the municipal council decided on an auction, the Tatas moved the High Court, and went in appeal when they didn’t get relief. In April 2017, the Supreme Court ruled that the property should be leased through auction, since it was a commercial and not a social deal. It over-ruled the municipal council’s decision to give the Tatas the right to match the highest bid. Such a first right of refusal would have a chilling effect, it said.
Auction – Not the First Option
The lease expired in October 2011. According to submissions made before the Delhi High Court, the municipal council agreed to extend the lease by 30 years. IHCL would pay the higher of Rs 21 cr per year or 17.25 percent of gross turnover for each of the first 10 years. Higher revenue share was prescribed for the subsequent years. But before the municipal council could go ahead with this arrangement both the urban development and home ministries advised auction. IHCL was to have the right to match the highest price bid, but later this clause was not inserted as it would have a chilling effect and the best price would not be secured.
Why did the Auction Fail?
There have to be at least three bids for an auction to go through. In the first round in June, the Tatas were the lone bidders. In the second round in July, the cigarette major ITC, also walked in.
Bidders were deterred by restrictive conditions. According to NDMC’s tender document, they have to singly or in partnership operate 500-700 rooms across a maximum of five locations in India. This precludes private equity funds, sovereign wealth funds like Singapore’s Temasek, budget hotel chains and real estate companies. Foreign chains are not eligible if they don’t have an India-presence.
The municipal council is understandably cautious. It would receive flak if the successful bidder were to exit mid-way. The Airport Express Metro line which Anil Ambani’s group walked out of, is a salutary example.
The financial commitments perhaps are daunting. At least Rs 3 cr a month or 17.25 percent of receipts (if higher) from rooms, food, beverages and sub-leases minus indirect tax deductions have to be shared with the municipal council. The minimum fee will escalate by 3 percent a month if the hotel is not up and running within 18 months. The operator has to obtain the security clearances. What will happen to the employees? The hotel has 800 of them. The new operator is not required to retain them, but a media flare-up over job losses will be damaging to their brand.
Learning from Past Auctions
Government auctions often do not go well. In 2002, the Vajpayee government sold Airport Centaur in Mumbai for Rs 83 cr. Twenty-one parties evinced interest but only one put in a bid. Batra Hospitality sold the hotel a few months later for a profit of Rs 37 cr. drawing accusation from opposition parties that the government had undersold the property. Ajit Kerkar, who was ejected by Ratan Tata from the Tata Group, was the sole bidder for Airport Centaur. (The lenders seized it a few years later over unpaid loans).
Just two companies bid for Delhi’s three electricity distribution companies when they were privatised in 2002. And for Indian Petrochemicals Limited, Reliance Industries, which itself is a large petrochemicals player, outbid Indian Oil Corporation and Nirma by a wide margin, causing apprehensions about concentration of market power.
(Vivian Fernandes is editor of www.smartindianagriculture.in. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them)
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