The bumpy path of disinvestment in Indian oil majors Hindustan Petroleum Corp. Ltd. and Bharat Petroleum Corp. Ltd. hit its biggest roadblock last week, when Indias Supreme Court ruled that privatization required Parliaments approval, as both companies were created by legislation during the 1970s.
Supreme Court Justices S. Rajendra Babu and G.P. Mathur stressed that the disinvestment policy was not being challenged. However, its legality on procedural grounds was questioned by the petitioners, the Center for Public Interest Litigation and the Oil Sector Officers Association.
Counsel for the petitioners, legal heavyweights Fali Nariman and Shanti Bhushan, argued that privatization could proceed by repeal or amendment of statutes, but not by executive action. Though the judgment has shocked the industry and rattled an unsuspecting stock market, legal circles are not overly surprised — the CPIL membership reads like a whos who of legal eagles.
Oil Sector Officers Association President Ashok Singh is jubilant and feels the Supreme Court’s Sept. 15 decision has vindicated the associations stance. Strongly opposed to privatization of the oil sector, which contributes handsomely to the exchequer, Singh (who also heads the Hindustan Petroleum Management Staff Association) says, We will lead by example and make HPCL the most customer-oriented organization by focusing on retail performance in every forum.
Following deregulation of the petroleum sector in April 2002, oil companies have notched record profits. In the fiscal year 2002-2003 Hindustan Petroleum (which has a 20 percent share in both petroleum retailing and lubricants) nearly doubled its after-tax profit, and achieved 28 percent growth in lube sales. Bharat Petroleum (with a 20 percent share in petroleum retailing and 10 percent in lubricants) posted an 81 percent jump in after-tax profit and 27 percent growth in lube sales. In addition both companies have reinvented themselves, both internally and externally, to face the impending challenge of competition from Reliance and Shell.
After many false starts the government had announcedin January that 34.1 percent of the governments 51 percent equity in Hindustan Petroleum would go to a strategic investor and 32.2 percent of its 66 percent stake in Bharat Petroleum would go through public issues in domestic and international markets. The Court order has abruptly halted the disinvestment.
On the eve of the judgment, prospective Hindustan bidders Reliance, Saudi Aramco-Shell, Kuwait Petroleum and BP were at various stages of conducting due diligence. Data room scrutiny and visits to refineries and other installations were undertaken in the face of protests from workmen unions. While Reliance and BP had nearly completed the process, Shell had just begun. BPs reaction to the setback is an official no comment. Royal Dutch/Shells Managing Director Malcolm Brinden has issued a statement to the effect that Shell has the patience to take a long term view. Reliance officials wereunavailable for comment.
Bharat Petroleum had appointed advisors, U.B.S. Warburg and Merrill Lynch, and work had begun on reconfiguring accounts to make them compliant with U.S. public accounting standards for the international public offering when instructions were received to stop work.
Will the government approach the Supreme Court for a review? Unlikely. It has lost face already, particularly in international investment circles. Attorney General Soli Sorabjee, who had opined that Parliaments assent was unnecessary, is compelled to stomach humble pie. The ruling has willy-nilly scuttled the future privatization of companies created by statute.
Will Parliament be approached for repeal or amendment? Doubtful. The entire opposition and some constituents of the 18-party ruling coalition, National Democratic Alliance, are vehemently opposed to the sale. With five states going to the polls in November and the Lok Sabha (Federal) elections in 2004, the government is unlikely to mess with a highly controversial issue.
The Hindustan-Bharat sell-off saga has exhibited all the ingredients of an action-packed potboiler: big money, political intrigue, stock market swings, ministerial wrangling, union strikes, courtroom drama, media glare and the mandatory dollop of suspense. A longish hiatus now appears likely, though the story is not over.