Indian Finance Minister (FM) Nirmala Sitharaman announced the government’s decision to divest five public sector companies by March, 2020. The state-run airline, Air India and oil refiner and marketer Bharat Petroleum Corporation Limited (BPCL) are among the five shortlisted companies. The privatisation of the national carrier and oilrefiner is expected to help the government meet its divestment target of Rs 1 lakh crore in the current fiscal year. According to industry insiders, the current fiscal deficit is a major reason for this decision. Official data show that India’s fiscal deficit stood at Rs 5.54 lakh crore at the end of August, which is 78.7% of the budgeted estimate for the current fiscal year.
The government holds about 53.29% of BPCL’s equity which translates to about Rs 62,000 crore ($ 8.63 billion) at current market prices. If another 10% is included as control premium, the government could get about Rs 68,000 crore if the company is disinvested today. The government’s dividend yield from BPCL amounts to about Rs 2200 crore per year. In addition to this, the government accrues unmeasurable benefits in implementation of its various schemes for the public at large which are useful for better poll performance. The question arises that why is the government willing to sell a company like BPCL which is biggest in terms of market capitalisation at Rs 117,000 crore.
Arun Balakrishnan, Former Chairman & Managing Director, Hindustan Petroleum Corporation Limited, told BE, “They need the money to bridge the fiscal deficit. But I support the sale of BPCL for a different reason. If I was the holder of 53% of this company, I too would have sold my holding now rather than at any time later. Something like 60% of the petroleum products is used for mobility. And alternatessuch as electric and hydrogen fuelled mobility is slowlyrearing their heads.”
On the other hand, this policy would threaten the security of 30,000 employees and would affect households of subsidised cooking gas. Massive agitations have taken place in the Assam-based Numaligarh refinery, which is located in a sensitive and restive area. A senior security official informed media that after the stake sale, the private investors could get their own manpower on the company’s board and the ground in Assam which can be a major area of concern for the workers. Moreover, according to industry insiders, the private entity who will be buying the companywill be buying it at a much lesser value than the market valueand if the private entity sells the company in future, it will accumulate a humongous profit.
Another concern of privatisation is the uncertainty surroundingthe proposed or ongoing projects of BPCL. In the case of Kerala, the state government has 5% stake in Kochi Refinery. The government recently proposed to set up a petrochemical park adjacent to the refinery on the assurance that feedstock from itwill be made available to the petrochemical park whichwill become uncertain with privatisation of the BPCL.
According to sources, the benefits that India used to enjoy in importing oil from oil-producing countries, apart from Saudi Arabia, are gone. Also, fracking is being discouraged due to the damage caused to the water table. Balakrishnan said, “Investors are thinking twice before investing big money into exploration of oil in difficult terrains because of the growing disenchantment with the carbon molecule. So, lesser investment can lead to high cost oil which would make the current cost of electric or hydrogen mobility look very attractive.”
Kishore Nair on behalf of Bharat Petroleum Technical and Non-technical Employees Association raised concerns. Post-acquisition, a private player may want to trim the work-force, curtailing certain benefits. More than 22 different employeeunions have planned to go on a strike across the country to protest against the government’s decision.
According to senior officials, Air India posted an operating loss of around Rs 4,600 crore in the last financial year, mainly due to higher oil prices and foreign exchange losses. The airline incurred an operating loss of Rs 175 to 200 crore in the three months ended June this year due to the closure of the Pakistani airspace forIndian carriers. It resulted in higher costs and caused a daily loss of Rs 3 to 4 crore when the restrictions were in place.
Sitharaman said there is a “lot of interest” among investors as evident in international road shows ahead of the sale of Air India as compared to 2018, which saw a weak demand from investors. The sale of the two state-owned companies could provide a crucial chunk of the government’s plan to raise `1 lakh crore as it struggles to cope with one of the steepest demand slowdowns.
R. Gopalakrishnan, Former Director, Tata Sons, who saw two divestments - CMC and VSNL, coming into the Tata fold - says successful disinvestments in India have depended on theability to push back on government interference and thenmerging the organisations fully. Gopalakrishnan recently told the media, “Governments are notorious for interfering, and even if they sell off 100%, they might still interfere, because Air India can easily become a political issue after divestment. The new management will need skills to repel such interferences, and at the same time must have integrating skills, fully merging Air India into their own organisations.”