The Hindu : Disinvestment loss

Online edition of India's National Newspaper
Saturday, Sep 20, 2003

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Disinvestment loss

By C. R. L. Narasimhan

The momentum gained in the wake of the Maruti public offer is lost. The disinvestment agenda now resembles the insurance sector before its opening up.

The Supreme Court verdict against the route proposed for the two oil companies' privatisation plans has implications that go well beyond the immediate future of the disinvestment programme. The latter — always controversial — had reached a decisive stage by the time HPCL and BPCL were cleared by the Cabinet Committee on Disinvestment (CCD) in early February 2002. At that time the programme was showing strong signs of gaining momentum with the strategic sales of several key public sector enterprises having been completed.

After the Supreme Court gave an unequivocal endorsement in the case of Balco it seemed as though there would be no more legal or other fundamental challenges to the policy as a whole. However, there have been at least two nagging issues concerning the programme in its entirety that remains unresolved till today.

Any privatisation programme concerning the oil sector was bound to be especially daunting: (a) profit making companies in a strategic sector cannot be so easily divested and (b) the methodology for divesting the Government's stake was expected to be particularly crucial.

Even as the Government decided to go for the strategic sale for HPCL and the public offer route for BPCL — a compromise incidentally — those opposed to the privatisation pitched on a ruling by the Standing Committee (December 20, 2002), which said Parliamentary approval was a must. The Government's decision to go through with the process was based on the opinion of the Attorney General. It must be a small consolation to those in charge of the disinvestment programme that the Supreme Court's ruling does not question the process but only the action in moving forward with the oil companies sale without Parliamentary approval.

While the two oil companies' future will possibly be decided only after the general elections, it is clear that the disinvestment programme has lost even over the short-term. For, the legal setback affects the programme in its entirety not just the two companies' privatisation. Clearly a positive verdict from the Supreme Court would have sent strong signals for the rest of the programme. After all candidates such as Nalco have been facing strong State-level opposition. And only last week the Government deferred the sale of National Fertiliser Company for want of adequate bidding interest. Much earlier the two airlines' sales were aborted for a similar reason: there were no serious bidders, who fulfilled all the eligibility criteria. Equally important if the Government had managed to complete the divestment in at least one of the two oil companies before March 31, 2003 it would have had something to show by of way of capital receipts for the Central Exchequer. So far during this fiscal year, the programme has mopped up a little over Rs.1,000 crores against the budgetary target of Rs.13,200 crores. That also shows that reliance on "big-ticket'' deals can be risky. Maruti's public offer a few months ago was a stupendous success — least of all because it mopped up Rs. 900 crores — but unfortunately the momentum, if any, has already been lost in the aftermath of the Supreme Court verdict.

The political opposition to the programme definitely gets a rallying point. For the oil companies the opposition was by no means confined to the political divide. Even members of the ruling coalition have resisted both overly and covertly. The Congress and other opposition parties are unlikely to agree to any kind of consensus in an election year. Even thereafter the issue is likely to remain alive irrespective of which coalition rules. Therefore a situation similar to what obtained before the insurance sector was opened up is emerging. Just as the IRDA bill was passed after a considerable delay and some dilution its original structure, the Parliamentary approval for the privatisation of oil companies is unlikely to come by easily.

Is it possible that the Government could have achieved something if it had not opted for the strategic sale route for HPCL? Any method, say, a stage by stage dilution of Government's equity stake but without altering the public sector character would have passed muster. A strategic sale implying a handing over of the company's management (along with a chunk of equity) to a strategic buyer is more akin to instant privatisation than when the Government offloads its equity in tranches. Each of the two methods used in India so far have had their supporters but obviously in the HPCL case the strategic sale route has been a stumbling block.

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