Disinvestment minister Arun Shourie: It's been a long, hard battle

The day after Arun Shourie announced to the Lok Sabha that the government would go ahead with the sale of oil majors Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL), it was business as usual at the Disinvestment Ministry's offices in New Delhi. Most of the ministry's 50-odd officials were busy in meetings throughout the day and all callers were politely told to call back only after 5 pm. For, Shourie and Co. had important business to take care of.

For the previous three months, the ministry was on tenterhooks. Not only were opponents of the ruling National Democratic Alliance against disinvestment of some key PSUs such as HPCL and BPCL, but even NDA's own top guns-including Petroleum Minister Ram Naik and left-leaning Defence Minister George Fernandes-were dead against the sale. But intense lobbying by Shourie, with some help from Prime Minister Atal Bihari Vajpayee, finally managed to break the impasse. On December 5-just two days ahead of the expiry of its self-set three-month deadline-the all-powerful Cabinet Committee on Disinvestment (CCD) finally agreed on a comprise formula for HPCL and BPCL. While the former would be sold to a strategic investor, the latter would be sold through a public offering.

In the interim, Shourie and his lieutenant Pradip Baijal had been working quietly on finalising plans for selling the government's equity in as many as 12 PSUs, including telecom majors Bharat Sanchar Nigam Ltd (BSNL) and the Mahanagar Telephone Nigam Ltd (MTNL). The December 10 announcement in Parliament means that Shourie is back in business, and with renewed vigour. Declares Disinvestment Secretary Baijal: ''Finally, disinvestment is back on track.''

Not a day too soon. The plan now is to privatise HPCL through the sale of equity to a strategic partner as was done in the case of Videsh Sanchar Nigam Limited (sold to the Tatas) and IPCL (Reliance), while 15 per cent of the government's 66 per cent equity in BPCL would be hawked to retail investors. The disinvestment of Shipping Corporation of India (SCI), Nalco (opposed by Union Coal and Mines Minister, Uma Bharati and Orissa Chief Minister Naveen Patnaik,) and Engineers India Limited (opposed by the trade unions) were also cleared by the Cabinet.

Although the CCD's formula was a compromise, it was enough to send the shares of PSUs soaring. ''The market was crying for a trigger and the big-ticket divestment announcements have provided just that,'' points out Navin Agarwal, Head (Institutional Finance), Motilal Oswal Securities. No wonder, then, the next day (December 6) the Sensex jumped 77 points, hitting a six-month high of 3,306.29. Renewed buying by domestic and overseas investors pushed some PSU stocks to new highs. EIL, for example, hit the circuit breaker after gaining 20 per cent. Others like Bharat Earth Movers, Balmer Lawrie, Rashtriya Chemicals and Fertilisers and National Fertilisers too rose by eight to 15 per cent, and HPCL by a whopping 22 per cent. The market's reading: While there may be pockets of resistance within the government, disinvestment will continue.

Still, A Tall Order

Nobody's denying that, but don't expect the disinvestment critics to just fade away. The biggest opposition party, Congress, has challenged the legality of the privatisation of HPCL and BPCL. Why? Because, Congress argues, nationalisation laws such as the Esso (Acquisition of Undertakings in India) Act, 1974, under which Esso was nationalised as HPCL, and the Burmah Shell (Acquisitions of Undertakings in India) Act, 1976, which led to the creation of BPCL, require the government to get a clearance from the Parliament before any disinvestment can take place. Therefore, the only way the government can obviate the Parliament is by repealing the nationalisation laws. The disinvestment ministry, which disputes Congress' interpretation, has asked the Attorney General for his opinion.

Besides, the three-month delay has taken its toll. First, it has put paid to the ministry's original plans of raising an ambitious Rs 50,000 crore through disinvestment-Rs 23,500 crore from strategic sale and ipos of National Aluminium Company Limited (Nalco), Maruti, HPCL, BPCL, SCI, EIL, MTNL, and NFL, and another Rs 26,500 crore from the public floats of IOC and ONGC (25 per cent each), GAIL (15 per cent) and BSNL and NTPC (10 per cent each). Today, Shourie himself admits that he may not be able to meet his Budget target of Rs 12,000 crore, given that the nine months of this fiscal disinvestment has garnered a mere Rs 3,100 crore.

Pradip Baijal, Secy., Disinvestment Ministry "Finally, disinvestment is back on track"

There's no guarantee that the next fiscal will be any better if things don't improve. Many bidders have left after waiting for months for the big-ticket sales to happen. Take the case of SCI, where the government wants to sell a majority 51 per cent stake to a strategic buyer. Although initially 11 companies had submitted their expression of interest for the shipping major, today only three bidders remain: Essar Shipping in conjunction with venture capitalists American Marine Advisers, and Sterlite Industries with Varun Shipping, and BPL. The disinvestment ministry, however, is busy drawing up the share purchase agreement, after which the financial bids would be invited.

Nalco faces a similar situation. L.N. Mittal of Ispat International, one of the largest steel producing companies in the world, decided to withdraw after waiting for months. There's still a lot of political opposition-at times violent-to its sale. Recently, a team from Hindalco that went to conduct a due diligence at Nalco was attacked by the PSU's workers. Says a Delhi-based consultant with an international consulting firm: ''Such violence not only scares away investors, but also damages the country's credibility with regard to its ability to deliver on commitments.''

The confusion over whether PSUs such as ONGC and GAIL will be allowed to bid for HPCL is unsettling to some investors. Those who oppose PSU bids for the company claim that it is contrary to the rationale of privatisation, since both ONGC and GAIL are government-owned. Also, they claim, there is very little synergy between ONGC and HPCL, or GAIL and HPCL. Contends Satyam Agarwal, an analyst at Motilal Oswal Securities: ''Except for the fact that the acquisition will give ongc a toehold in the more profitable downstream industry (refining and marketing of petroleum products) and a presence in the entire value chain, there is little else in common between the two companies.''

In fact, the HPCL refinery, which processes 5.5 million tonnes of crude per annum (MTA) in Mumbai, will not be able to use more than 2.5 million tonnes of ONGC's total crude production of nearly 16 MTA, since the HPCL refineries are more accustomed to processing heavier crude, and not the lighter variety produced by ONGC. Therefore, ONGC may be hard pressed to justify an approximate Rs 7,640 crore or so investment in HPCL (Rs 4,250 crore for acquiring 25 per cent stake and another Rs 3,400 crore for the mandatory open offer at Rs 500 per share).

For GAIL, it makes even less sense, since HPCL makes little use of gas in its day-to-day operations. So what can HPCL do with all the gas produced by GAIL? A possible answer could be to convert it into CNG (compressed natural gas) and sell it through its various outlets. But that market is far too small and limited to bigger cities to justify such a huge investment.

But for a company like Reliance, which has a 27 MTA capacity for refining, acquiring HPCL could well be just what the doctor ordered. Not only will it get a country-wide network of 4,600-odd petrol pump outlets for its petrol products at one go, but also effectively insulate it from MNC competition (Indian Oil Corporation and ONGC are not being privatised). While having ONGC and GAIL in the fray may help the government, it could lead to a bidding war that eventually hurts the buyer.

Still, if Shourie is taking a calculated risk, it's for good reason. There is a huge appetite for the two oil companies, simply because HPCL is the only oil company up for strategic sale. In other words, the entry options to foreign oil giants narrow down to HPCL. They either get it or don't. Therefore, expect Shell-which lost out to Reliance in its race for IPCL-to bid aggressively this time around. From what the ministry officials say, there's a big queue of MNCs for Nalco, which will be privatised in three stages: a local IPO issue, then an ADR, and finally a strategic sale. Canada's Alcoa, Australia's BHP, Russia Aluminium, Glencore International of Switzerland, and Hindalco are all in the fray. The attraction, of course, being that Nalco is one of the lowest-cost producers, with a 25 per cent cost advantage over global competitors. It also sits on some of the best bauxite mines in the world, has consistently delivered free cash flows, and has a huge net profit margin of 16 per cent.

There are at least four PSUs that will be sold via IPOs. And that, marketmen say, is good news. Says Prithvi Haldea, Managing Director, Prime Database: ''Good PSU IPOs have the potential to move the market.'' But the success of the IPOs will depend to a large extent on their pricing. Don't forget that most of the hot PSU stocks have swung wildly over the last 18 months in sync with the disinvestment mood. There's a lot of speculative premium that is reflected in their prices. To lure retail investors, the government must sell these stocks at a price 15-20 per cent lower than the listed price. Employees of the public sector units have been promised stocks at one-third the market price.

Shourie's immediate concern must, however, be to quickly consolidate on the consensus he has been able to patch together. Sure, compromise deals such as the setting up of a Disinvestment Fund that will draw from the disinvestment proceeds to finance employment opportunities for employees in ailing PSUs and social and infrastructure projects, among others, will appease a lot of critics, but uncertainties remain. The only thing certain is that, as long as they keep their offices, Shourie & Co. will continue to champion disinvestment.