Announced last February, the decision to disinvest in Indias government-controlled oil majors Hindustan Petroleum Corp. and Bharat Petroleum Corp. is finally taking some concrete shape. On Feb. 4 the Indian government announced that the Hindustan sale would be complete by June.
With a combined 40 percent share of Indias petroleum retail segment and 30 percent of the lube business, Hindustan and Bharat are plum offerings. Hindustans new owner will inherit a 20 percent lube market shareplus command 41 percent of the countrys installed base oil capacity. Though lubricants constitute just 2 percent of Hindustan’s sales, they account for 20 percent of gross profit. Throw in an enviable spruced-up retail network andyou have anopportunity too good to pass up.
The only likely Indian bidder, the Reliance group with its vast resources and shrewd grasp of business and political trends, is a keen contender in a suitor list that includes BP, Shell, ExxonMobil and TotalFinaElf. Shailaja Sharma, public affairs manager at Shell India, says, We have been studying the governments decision to divest, are watching the situation and will respond in an appropriate manner.
Disinvestment debate in Indias oil sector has witnessed many a storm. In September, following much lobbying and histrionics starring a cast of cabinet ministers, the government deferred disinvestment plans for three months in Hindustan and Bharat, where it holds 51 percent and 66 percent stakes respectively. Divergences of perception chiefly between privatization champion Disinvestment Minister Arun Shourie, and Petroleum Minister Ram Naik, a guarded anti-sell-off advocate, were apparently narrowed down in late December through a compromise formula.
Accordingly, Hindustan was to be sold to a strategic buyer and Bharat was to be disinvested through a public offer of shares. The contentious issue of allowing the cash-rich, government-owned Oil and Natural Gas Commission to be a bidder was left unresolved. Shourie was vehemently opposed to including the Commission; Naik was as stridently in favor.
The anti-disinvestment lobby raised the issue of constitutional propriety, stressing that Hindustan and Bharat were created by Acts of Parliament in 1974 and 1976 respectively, and that the prospective transfer of government control required Parliaments assent, a doubtful proposition considering the oppositions anti-sell-off stance. Eventually, on Jan. 20, the Attorney General pronounced that Hindustan-Bharat privatization did not warrant parliamentary action.
On Jan. 26, Indian Republic Day, the cabinet held a special meeting hammering out the final blueprint in an apparent signal that wrangling was history.
The outcome?
- The Oil and Natural Gas Commission was debarred from the bidding process;
- 34.1 percent of Hindustans equity would go to a strategic investor and 5 percent to the companys employees, leaving the government with 12 percent;
- 32.2 percent of Bharats stake would go through public issues in domestic and international markets and 5 percent to employees, leaving the government with 26 percent.
Time frame: eight to 12 months. The existing eligibility criterion for bidding, investment of Rs. 2000 crore (U.S. $420 million) in the hydrocarbon sector, was duly buried.
Another serious controversy was resolved. The completion of Hindustans incomplete Bhatinda refinery, considered somewhat redundant given Indias excess refining capacity, was to be entrusted to either the Oil and Natural Gas Commission or Indian Oil, the countrys largest oil major.
The latest twist in the tale is a strike notice served by the Oil Sector Officers Association:A strike is to commence from the day bids are invited. Ashok Singh, the groups convener, says, We will not allow bidders entry when they come for evaluation; we have letters of support from power and telecom unions and our own workmen unions.
Will the strike actually materialize? Singhs response: We are optimistic that the situation will improve and there will be no need to strike, as several sections are showing their opposition to the privatization of oil companies which are big profit earners contributing handsomely to the national exchequer.
Speaking of profits, Bharat posted a 224 percent profit over the previous year in the quarter ended December 31, while Hindustan declared a whopping 444 percent increase over the same quarter last year. A section of the media is in fact questioning the financial prudence of hawking current assets to meet routine subsistence needs. Indeed, the disinvestment ministry has already filed caveats in different high courts and the Supreme Court to ward off legal challenges to oil sector disinvestment.
Judging by past upheavals it is premature to rule out the emergence of a couple more rabbits from the happenstance hat. Read: legal action and strike call.