Hastening slowly

The Union government presses ahead with its disinvestment programme despite reservations within and resistance outside.

A THREE-month hiatus in the disinvestment programme was enforced in September to sort out the prickly disagreements that had arisen within the Union Cabinet on the sale of government equity in two giant petroleum refining and marketing companies. That Union Minister for Disinvestment Arun Shourie sought to set the process in motion at the first opportunity after the expiry of the three-month pause, is an index of the priority that the government attaches to the sale of public sector enterprises (PSEs). The temptation to let the pause linger on must have been strong since underlying differences have not quite been sorted out. But Shourie was evidently keen to appear decisive, even if the compromise he announced in Parliament on December 9 follows the far-from-innovative procedure of splitting the difference between rival opinions. And in adding the rider that there would be no fixed time horizon for completing disinvestment in Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL), Shourie effectively conceded that the compromise could, in its implementation, still engender multiple points of friction.

There was of course the viewpoint within political circles best articulated by the Left that disinvestment in the petroleum companies made little sense. Both HPCL and BPCL had been earning profits, contributing substantial dividends to the Central exchequer, and imposing few demands on government revenues to meet their investment needs. When the Central government's revenue account was in deficit, it made little sense to sell assets that earned revenue. This would be equivalent to the worst form of fiscal imprudence getting rid of productive assets to meet daily subsistence needs.

This variety of robust common sense though, seems curiously at a premium in this decade of liberalisation. Obliquely though, the government conceded that the critics had a point by demanding, and in most cases obtaining, "special dividends" from many of the PSEs that were scheduled for disinvestment. Thus, many of the PSEs in the petroleum sector were obliged in recent months to pay out larger sums as dividends than they were strictly obliged to.

Despite this virtual giveaway, the basic dispute over disinvestment still boils down to the modalities of equity sale. The true enthusiasts like Shourie believe that the method of floating shares through the markets had been given a fair chance and failed, leaving the government with no option but to contract with strategic partners for transferring a controlling stake in key PSEs. That was the technique followed in the sale of companies such as Videsh Sanchar Nigam Ltd (VSNL) to the Tata group and Bharat Aluminium Corporation (BALCO) to the Sterlite group. It is of course another matter that both transactions turned out to be controversial. Soon after their takeover, the Tatas chose to plough a large part of VSNL's cash reserves into the purchase of shares in their as yet incipient telecom venture. And the Sterlite group has subsequently been censured by the sharemarket watchdog body, the Securities and Exchange Board of India (SEBI), for rampant irregularities during a phase of speculative excess in the bourses.

Both transactions managed to surmount the initial controversies in part because there is a strongly favourable tilt in the political environment towards privatisation. Recent events have shown that for the true enthusiasts, disinvestment is not just a question of maximising yields from equity sale. Rather, they are eager to see that disinvestment actually means privatisation and not the transfer of control to another PSE. The purchase of the country's largest stand-alone petroleum marketing company, IBP Ltd., by Indian Oil Corporation (IOC) was frowned upon for this reason, although the winning bid submitted was almost twice as high as the next.

The sceptics were quick to argue that in the case of giant corporations such as HPCL and BPCL, the cumulative effect of all Shourie's strictures would be little else than the creation of private monopolies in a strategic sector. If PSEs with adequate cash reserves and financial clout such as IOC, the Oil and Natural Gas Corporation (ONGC) and Gas Authority of India Ltd (GAIL) were to be proscribed from bidding for HPCL and BPCL, the only contenders left in the fray would be India's largest private enterprise, Reliance Industries, and the petroleum multinationals. Neither outcome was desirable. The entry of multinationals into the petroleum sector could jeopardise energy security in a context of global economic and strategic uncertainty, especially over the control of crude oil sources in the Gulf region. And Reliance already controlled a substantial share of the national petroleum refining capacity and was following its acquisition of Indian Petrochemicals Corporation Ltd (IPCL) already a virtual monopoly in the petrochemicals sector.

But with the tide of political opinion in part under external tutelage running strongly in favour of disinvestment, the critics had no option but to propose alternative modalities. To Shourie's evident disdain, Union Petroleum Minister Ram Naik proposed that BPCL and HPCL could be disinvested through placing their shares in the market for the general public, with the normal safeguards operating to ensure that there was no undue concentration of shares with any single entity.

After the three-month hiatus, the time-honoured technique of splitting the difference has won out. According to the formula proposed by Shourie, the government would sell its shares in BPCL through the public offer route, while HPCL would be transferred directly to a strategic partner. There is no clear rationale to explain what determined the choice of methodology for each company the methodologies could well have been reversed. Nor is there even the remotest hint of agreement on the entities that would be permitted to bid for the strategic sale of HPCL. Both ONGC and GAIL, under Naik's obvious guidance, have announced that they would like to bid for controlling stakes in HPCL. Reliance for its part has also made its interest evident. Ironically, the Swadeshi Jagaran Manch (SJM), a close affiliate of the Rashtriya Swayamsewak Sangh (RSS), has pitched in with the demand that if PSEs are forbidden from bidding for HPCL, all Indian companies should likewise be restrained. The intent clearly is to stop the acquisition of the PSE by Reliance. It somehow seems the lesser evil for the SJM to have a petroleum multinational taking control of HPCL. And then there are muttered apprehensions in the market that Reliance through its enormous leverage in the stock markets could ultimately be the single largest beneficiary of the BPCL public offer.

With all these issues still hanging fire, it is little wonder that Shourie has chosen not to set a time-frame for completing the process. He has, however, been at pains to assure a sceptical public of various other safeguards to check against the rampant abuses of the disinvestment process. The proceeds from PSE equity sale, for instance, would not entirely go into the revenue account. Rather, as Shourie assured Parliament, a portion would be set apart for a "disinvestment fund", which would be used for financing fresh employment generation, retiring high-interest public debt and developing infrastructure in backward areas. Government would further ensure that disinvestment did not result in the creation of private monopolies. And PSE workers would be given a specified portion of the equity of their companies at a concessional one-third price.

Shourie has ample reasons to tread a wary path. Apart from the controversies over Sterlite and the Tatas, the disinvestment process recently threw up a fairly rank instance of profiteering at the public expense in the sale of Airport Centaur Hotel in Mumbai. Following the initial transaction, which transferred the property from the public sector Hotel Corporation of India a fully-owned subsidiary of Air India to the Batra Hospitality group, it was found that there had been a further sale in the space of a few weeks. And in making the subsequent sale to the Sahara group, which has interests in the aviation business and was hence restrained from bidding the first time around, the Batras made a clean profit of over Rs.30 crores.

Following a six-hour debate on disinvestment in the Rajya Sabha, Shourie suffered the mortification of seeing a Shiv Sena member, Sanjay Nirupam, frontally accuse him of corruption in the Centaur deal. The Minister threatened privilege action for the alleged use of forged documents in the House, but there was little question that his moral aura had suffered serious damage.

A quite different manner of problem arose from the Opposition insistence that the transfer of HPCL and BPCL to private ownership should be done through enactment of a law by Parliament. This demand was founded upon the act of Parliament by which these two corporations were created in 1974 after wholly divesting three foreign-controlled enterprises of their controlling interests. Shourie, after consultations with the law officers of the government, has proffered the opinion that after nationalisation, both BPCL and HPCL were governed by the provisions of the Indian Companies Act. The sale of shares and the transfer of ownership in these would be strictly in accordance with the law as laid down in that Act. The Opposition remains unsatisfied and Shourie has promised higher levels of consultation before he announces his further plans. Clearly, he has many more obstacles to surmount before his ideological programme, seemingly so divorced from economic logic and the public interest, makes any further headway.