The Hindu Business Line : Disinvestment in danger

The imbroglio over the attempts to privatise HPCL/BPCL, and now bringing up the issue of splitting up IOC could actually jeopardise the entire divestment programme of the Union Government, says Paranjoy Guha Thakurta, who looks at the oil PSU s privatisation that threatens to snowball into a major crisis within the NDA Government.

THE controversy surrounding the Disinvestment Minister, Mr Arun Shourie's intransigent position on privatising public sector petroleum companies, especially Indian Oil Corporation and Hindustan Petroleum Corporation Limited, threatens to snowball into a major crisis within the National Democratic Alliance Government. What seems worse for Mr Shourie and his mentors, including the Prime Minister, Mr Atal Bihari Vajpayee, and the Deputy Prime Minister, Mr L. K. Advani, is that the imbroglio over the attempts to privatise these two companies could actually jeopardise the entire divestment programme of the Union Government.

In other words, Mr Shourie may well end up cutting his nose to spite his face. By his actions, he has not merely antagonised his political opponents but also sharpened the criticism of those within the Bharatiya Janata Party-led NDA Government who had strong reservations about the methodology deployed by him to privatise some of the largest, best-managed and most-profitable public sector undertakings. One would not be exaggerating if one argued that the one individual who contends that he is among the biggest votaries of privatisation has willy-nilly become its single biggest enemy.

After the September 16 judgment of the Supreme Court restraining the Union Government from privatizing HPCL without obtaining Parliament's approval, the Disinvestment Minister disingenuously claimed the entire privatisation programme had been derailed. His own ministerial colleague, the Petroleum and Natural Gas Minister, Mr Ram Naik, however, hailed the judgement as a "historic" one. Thereafter, on October 3, following a meeting of the Cabinet Committee on Disinvestment, Mr Shourie contended that the Government would seriously consider a proposal to split the country's largest company, Indian Oil Corporation, into smaller entities before privatising its marketing arm. Newspapers quoted Mr Naik as saying that something quite different had transpired during the CCD meeting.

It is hardly a secret that the Petroleum Minister had been opposed to the privatisation of HPCL but had been overruled by his Cabinet colleagues at the December 9, 2002 CCD meeting. Mr Shourie had wanted both HPCL and Bharat Petroleum Corporation Limited to be privatised. However, at that meeting, it was decided that while the larger HPCL would be privatised, the shares of the smaller BPCL would be divested to the public. If the Cabinet eventually decides to privatise IOC — and there is no guarantee that it will — it would go back on its own decision not to privatise IOC as well as two other navratnas the oil PSUs Oil and Natural Gas Corporation and GAIL Limited.

IOC is India's largest petroleum refining and marketing company with a daily turnover in excess of Rs 320 crore. The management had last year lodged a strong protest when it was disallowed by the Government from bidding for the shares of its smaller sisters, HPCL and BPCL. The former IOC Chairman and Managing Director, Mr M. A. Pathan, had argued that it would be clearly discriminatory on the part of the government if a private corporate group like Reliance was allowed to bid for Indian Petrochemicals Corporation Limited while denying IOC the opportunity to bid for HPCL and BPCL. The Government allowed IOC to bid for IPCL — managerial control over which was acquired by the Reliance group in May 2002 — but subsequently barred one PSU from bidding for the shares of another on the ground this did not result in "genuine" privatisation. (IOC had earlier successfully bid for managerial control over IBP Limited, formerly Indo-Burma Petroleum.)

After the Government allowed the Reliance group to control IPCL thereby enabling the combine to hog a more than three-fourths share of the country's market for a wide variety of petrochemical products, Mr Shourie's privatisation methodology started encountering concerted opposition from within the BJP and the NDA. It was not merely Mr Naik (whose vast empire as Petroleum Minister was sought to be shrunk) who opposed him but the Defence Minister and NDA convenor, Mr George Fernandes, as well who wrote to the Prime Minister in protest. What is especially curious is that an attempt should now be made to split IOC, the only Indian company in the Fortune 500 list, at a time when petroleum companies all over the world over are coming together to become bigger and bigger.

Unlike HPCL and BPCL, both of which were nationalised in the 1970s after taking over the assets of foreign oil companies, there is no legal bar on the government privatising all but a handful of the 236 Central PSUs in India (including the 130 profit-making ones such as IOC, ONGC and GAIL). Yet, the reactions of Mr Advani and Mr Shourie make it amply clear that the Government did not believe it would be able to muster the support of a majority of the members of both Houses of Parliament to change the law of the land. This not only indicated that there were sharp differences of opinion on the subject within the NDA but also that there was no political consensus cutting across party lines on the modalities of privatising profit-making PSUs.

Instead of rushing headlong on to a confrontation with the Judiciary, the Government decided that it would merely ask the Supreme Court Bench that passed the order on HPCL to clarify its judgment. The apex court made it clear that it was not commenting on the government's policy of privatisation but merely asking the Executive to go to the Legislature to change the statute before privatising HPCL.

The former Disinvestment Commission Chairman, Mr G. V. Ramakrishna, has commented that Mr Shourie should not have acted in "unseemly haste" by asking private groups such as Reliance and Shell to proceed with due diligence of HPCL even as the Supreme Court had reserved its judgment after hearing arguments on both sides.

It is not merely this correspondent but many others who have argued that Mr Shourie has wrongly chosen to focus his attention and energies on a few high-profile, well-performing PSUs to the neglect of others that cry out for immediate attention — particularly chronic loss-making companies such as National Textiles Corporation. As T. T. Ram Mohan, professor at the Indian Institute of Management, Ahmedabad, aptly remarked: "Mr Shourie has erred not merely in his choice of firms but in his insistence on a particular method, strategic sale (that entails handing over managerial control of a public sector company to private promoters) as the norm for disinvestment".

IOC and HPCL share around three-fourths of the country's market for petroleum products. The IOC management recently offered to pick up the government's stake in HPCL for roughly Rs 10,000 crore — to make up the shortfall in the budgeted receipts from divestment this financial year — adding a new twist to the episode.

The Reliance and Shell groups are, among others, keen on acquiring the marketing and distribution network of either HPCL or IOC. Whereas Reliance has set up one of the largest petroleum refineries in India and Asia, it so far does not possess commensurate marketing and distribution facilities. On the other hand, the multinational Shell is hopeful of distributing imported petroleum products. It would be expensive for both these groups to set up a marketing infrastructure on their own. And as Mr Ramakrishna points out, given that many retail outlets of IOC and HPCL are at prime locations, a private group may not be able to purchase such property for love or for money. That is why controlling HPCL or a part of IOC would make all the difference for Reliance or Shell. That is also the real reason why Mr Shourie's policies are as contentious as they are.

(The author, with over 25 years of experience in various media — print, Internet, radio and television — is Director, School of Convergence, International Management Institute, New Delhi. He can be contacted at paranjoy@yahoo.com.)

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