A brake on sale of oil majors

Published : Oct 10, 2003 00:00 IST

The Supreme Court halts the disinvestment of HPCL and BPCL and puts a question mark over the fate of nearly three score publicly owned companies that are on the anvil for disinvestment.

THE law may be termed an ass, but for the common people it remains the only hope. On September 16, the Supreme Court effectively blocked the government's disinvestment drive by ruling that its move to disinvest its stake in two major petroleum companies - Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL) - violated the law. The far-reaching judgment has not only halted the sell-off of the two oil majors, but also placed a question mark over the fate of nearly three score publicly owned companies that are on the anvil for disinvestment.

The 21-page judgment, delivered by Justices S. Rajendra Babu and G.P. Mathur, ruled that the government's move to sell BPCL and HPCL was in contravention of existing statutes. It restrained the government from selling off its stake in the two companies "without appropriately amending the statutes concerned suitably". The judgment was in response to a writ petition filed in March by the Centre for Public Interest Litigation, challenging the government's decision. Later, two other petitions, including one filed by the Oil Sector Officers' Association (OSOA), were merged with this petition. Earlier, on January 26, the Cabinet Committee on Disinvestment (CCD) approved the Disinvestment Ministry's proposal to sell 38.2 per cent of the government's stake in HPCL to a strategic investor, and offload 34.01 per cent of its equity through a public float, including 25.2 per cent through the issue of American Depository Receipts (ADRs). The government currently holds 51 per cent of the equity in HPCL and 66.2 per cent in BPCL.

The reaction to the judgment was on expected lines. They reflected the sharp divisions in the polity that the disinvestment of cash-rich and highly profitable companies has come to acquire since the Bharatiya Janata Party-led National Democratic Alliance (NDA) government commenced the process in "big ticket" companies with the controversial sale of Bharat Aluminium Company (Balco) in 2001. The deep division in opinion on the ruling has also seriously undermined the government's claim that it had evolved a national consensus on the issue. Those passionately espousing the cause of disinvestment went into a stupor. They bemoaned that because of "lack of political will" the issue will now meander through Parliament, arresting the momentum of the disinvestment drive. The country's prestige among the comity of nations was, they alleged, seriously compromised because of the ruling. They pointed out that the coming elections to State Assemblies, followed by general elections in 2004, meant that politicians, in "populist" mode, could not be expected to address weighty issues such as disinvestment.

Those opposed to the government's sale of BPCL and HPCL welcomed the judgment. Although they fell in two distinct camps, they believed that the government's sale of its equity in the two companies was an affront to Parliament and that it violated the Constitution. One section, reflecting a shade of opinion not necessarily opposed to privatisation per se, celebrated the judgment because it upheld the rule of law and democratic principles. Those who are in this section argued that the government, by its stubborn refusal to obey the spirit of legal statutes that governed the very existence of these companies, had been brought to book. Others, with a stronger opposition to the very notion of privatisation as a pillar of a liberal economic policy regime, joined in the celebration because they recognised that the judgment was far-reaching in significance. In particular, they pointed hopefully to the possibility that the judgment reverses the judicial interpretation that economic policy is the prerogative of the state, as laid down by the Supreme Court's judgment in the case challenging the sale of Balco in 1991.

THE question before the Supreme Court was whether the government's action of disinvestment in BPCL and HPCL violated the special statutes that resulted in the formation of the two companies in the 1970s. HPCL arose out of the government's acquisition and merger of four foreign oil companies - Esso, Lube India Limited, Caltex Oil Refining India Limited and Kosan Gas Company Limited. The legal instruments to enable these acquisitions were passed by Parliament in two special statutes - the Esso (Acquisition of Undertaking in India) Act, 1974 and the Caltex (Acquisition of Shares of Caltex Oil Refining India Limited and all the Undertakings in India for Caltex India Limited) Act, 1977. With a crude oil refining capacity of about 13 million tonnes a year, the company's gross sales in 2002-03 amounted to almost Rs.15,000 crores and a net profit of more than Rs.600 crores. BPCL's story is similar. It arose out of the government's acquisition of two companies operated by the foreign-owned Burmah Shell in 1976. The legal instrument for this acquisition was the Burmah Shell (Acquisition of Undertaking in India) Act, 1976. BPCL and its two subsidiaries have an installed refining capacity of 19.5 million tonnes a year.

Although the two companies have relatively smaller refining capacities compared to the giant Indian Oil Corporation, both companies have an extensive countrywide marketing network. Ashok Singh, convener of the OSOA, told Frontline that margins in the refining area of the oil business had been declining, primarily because of excess capacities. However, he said that private oil companies such as Reliance Industries and Shell were eyeing both companies, with their extensive marketing networks, because the margins in the marketing business remained attractive. Although Reliance has in the last few years established significant refining capacities, its marketing reach is insignificant when compared to what the public companies have established.

The petitions challenged the government's contention that the companies could be sold off without amending or repealing the statutes that resulted in the very existence of the two companies. The Centre for Public Interest Litigation argued that the enactments were meant to further the objectives of Article 39 (b) of the Constitution, which reflected the objective of building a welfare state with an egalitarian order. The petitioners argued that a disinvestment of government stake in the two companies, without repealing or amending the three Acts concerned, would violate the Constitution.

The petitioners also cited the preambles to the Acts to substantiate their argument. For instance, the preamble to the Act that led to the acquisition of the Burmah Shell companies stated that the foreign companies concerned "should be acquired in order to ensure that that the ownership and control of the petroleum products distributed and marketed in India by the said company (Burmah Shell and its associate) are vested in the state and thereby so distributed as best to subserve common good".

In fact, Rajinder Sachar, former Chief Justice of the Delhi High Court, who also appeared for the petitioners in the case, wrote in The Hindu on February 3 that the text of the preamble of the Burmah Shell acquisition Act bore close resemblance to the Directive Principles of State Policy, which directed state policy to function in a manner that will ensure that the ownership and control of material resources were distributed in a manner that "subserve(s) the common good".

The government, resting its case on the favourable verdict that it got in the Balco case, focussed its case in narrower terms. It argued that disinvestment was an administrative prerogative of the government and related to matters of economic policy. It also argued that the two companies were registered under the Companies Act and that because neither the Companies Act nor the guidelines laid down by the Securities and Exchange Board of India (SEBI) restricted the sale of shares of companies registered under the Act, the government was justified in proceeding with the disinvestment in BPCL and HPCL without getting a mandate from Parliament.

The government, represented by Solicitor-General Harish Salve, referred to the successful sale of its equity in Maruti Udyog Limited to Suzuki Motors, whose acquisition was also effected by the government through a specific statute. It argued that though the oil industry was an "important sector", increasing efficiency through greater competition and through the device of disinvestment was just as important. The government argued that the nature of the assets originally acquired from the foreign oil companies had changed dramatically after almost three decades.

The government said that the Acts provided for the shares to be in the hands of a "government company", which, under the prevailing provisions of the Companies Act, meant that 51 per cent of the shares be held by the government. However, the government claimed that the definition of a "government company" could be amended by suitably modifying the Companies Act. It also argued that the concept of "common good" that was cited in the preamble to the acquisition Acts, lent itself to elastic interpretation. It argued, rather ingeniously, that "common good" is a matter of economic policy and that "with passage of time, the needs of the economy may dictate changes".

The government claimed that in view of the changes that the oil sector had undergone in recent years, "the continuance of government ownership of shares in these companies is no longer considered to be necessary". Instead, it argued that "common good" would be best served "by the privatisation of these undertakings and that this perception is a matter of economic policy and not amenable to judicial review".

JUSTICE Rajendra Babu's judgment starts from a "constitutional angle", examining how Parliament authorises the formation of a public sector company. It is this reasoning that gives the judgment its far-reaching consequences for the disinvestment process. He observed: "When the government decides to set up a new company the investment for setting it up is shown as a `new instrument of service'."

It is on the basis of the `instrument' that Parliament authorises allocations from the Budget. The "setting up of a new public sector company is thus defined as a `new instrument of service'; and, since parliamentary approval is a must for this to happen, it follows that no public sector company can be formed without Parliamentary sanction."

Given this, Justice Rajendra Babu, asked the searching question: "If this is the background in which a new company is set up, can such a company be dismantled without some kind of parliamentary mandate?" After serving this fresh way of looking at the legal instruments governing the life and death of nationally owned companies, Justice Rajendra Babu then proceeded to address the question relating to the disinvestment in HPCL and BPCL.

Referring to the government's claim that since there is nothing in the three Acts which mandate that the government hold a majority stake (51 per cent or more) in the two companies, as is the case with statutes relating to the public sector banks and the nationalised coal companies, Justice Rajendra Babu chose to interpret the issue in the light of the preamble to the Acts, which he said were identical. He also said that there are statutes that require "government companies" to be scrutinised by the Comptroller and Auditor-General. Pointing out that "annual reports on the working affairs of the company are laid before Parliament", he remarked: "Such control will be lost if a company ceases to be a government company."

Without mechanically interpreting the judgment in the Balco case, Justice Rajendra Babu said that the issue of the sale of state equity in a government company was not raised in that case. Instead, the trade unions challenged the deal claiming that the valuation was not done fairly. In effect, the reasoning of the judgment appears to significantly extend the scope for contesting the privatisation policy of the government.

Importantly, referring to the sale of Maruti Udyog Limited, the judgment points out that it may well have been struck down as illegal if it had been challenged in the court.

The judgment also embarks on the question of whether a privatisation law is needed. Quoting extensively from the book, The Privatisation Challenge, written by Pierre Guislain and published by the World Bank, the judgment suggests that the government explore the possibility of evolving legislation facilitating a privatisation programme. However, Justice Rajendra Babu noted: "The success of the programme hinges on, among other things, a basic consensus among Parliament, government, and head of state on the scope and broad lines of the programme." This would not only result in a "clear mandate" for privatisation, but would also give the "executing agencies" the powers to implement the programme. A clearly structured legal regime would result in an "unambiguous, flexible, and competitive privatisation procedures applied in a transparent manner by officials accountable for their actions".

THE question of disinvestment has always been contentious and consensus on the issue has proved elusive. The Union Cabinet is as divided today as it was a year ago on the question of disinvestment in the oil majors. Minister for Disinvestment Arun Shourie and Minister for Petroleum Ram Naik have been at loggerheads over the issue. The conflict has often been carried into the media, where Shourie, as a former journalist, is on familiar turf to do battle. Within the NDA government, there is no semblance of a consensus either; the Shiv Sena, the Samata Party and the Janata Dal (United) had, in Parliament, vociferously attacked the move to sell the government's stake. Although the Congress(I) maintained a somewhat ambivalent position initially, it is clear that it too is not willing to sup with the government on the issue.

It is not surprising that there is little sympathy for the government even from quarters more favourably disposed to the notion of privatising state-held companies. This is because of the perception that the government, despite several warnings from various quarters, went ahead with its attempt to sell BPCL and HPCL. The overwhelming impression about the HPCL-BPCL affair is that the government was impatient and foolhardy, and unwilling to be tied down by democratic and parliamentary niceties.

In fact, the only available political consensus on the issue was the one arrived at by the Standing Committee of Parliament attached to the Union Ministry of Petroleum and Natural Gas. The 42nd Report of this committee, tabled in both Houses of Parliament on May 8, categorically stated that the "parliamentary sanction is mandatory" if the government intended to divest its stake. It also reminded the government that the two companies were formed to further economic development and for protecting "national security".

It remarked: "It will be politically wrong and economically incorrect to leave its control in the hands of private companies." This report, as well as an earlier one with similar advice to the government (laid in both Houses of Parliament in December 2002), was ignored by the government in its headlong rush to disinvest its stake at any cost. It is important to recognise that the Standing Committee, headed by Uttar Pradesh Chief Minister and former Defence Minister Mulayam Singh Yadav, and in which there are more than 40 members from across the political spectrum, remains the only tangible political consensus on the matter.

In January, the OSOA wrote to the Prime Minister asking him to stop the privatisation of the oil companies. It pointed out that HPCL had been highly profitable, had paid high dividends to the government and had free reserves of Rs.5,500 crores. The OSOA also reminded the Prime Minister of the situation in 1971 when India was at war, when the multinational oil companies did not maintain adequate fuel stocks of petroleum products. Later, in another letter to the Prime Minister in February, the OSOA pointed out that the replacement cost of HPCL's assets would be more than Rs.50,000 crores, implying that the private acquirer would be able to acquire this at a fraction of its true value.

Following the uproar in Parliament, the Disinvestment Ministry referred the question to the Advocate-General for his opinion on whether the sale of equity in the two companies required parliamentary approval. On January 20, Advocate-General Soli Sorabjee gave his opinion on the matter, pointing out that while parliamentary approval may not be needed "in principle" for the dilution of the government's stake in the two companies, much would depend on the terms of the actual agreement which the government would enter into with the strategic partner at the time it actually effected the sale of its stake. Six days later, on Republic Day, when Finance Minister Jaswant Singh was away in Davos, the CCD met to approve the sell-off. The decision, for the first time, clearly indicated that the two companies, after dilution of the government's stake, would no longer be "government companies", that is, entities in which the government held at least 51 per cent of the equity.

In hindsight, it appears that the Advocate-General's opinion on the matter may have been different if he had been asked specifically whether the move to reduce government stake below 51 per cent would require amendments or repeal of the relevant pieces of legislation. The Advocate-General may also have been in a better position to offer advice if his opinion was sought after the CCD meeting. Again, with the benefit of hindsight, the only possible explanation why this more reasonable approach was not chosen appears to have been the government's haste.

In March, five legal luminaries, among them four former Judges, issued a statement condemning the move to disinvest the government's stake. They remarked that the move was aimed at "bypassing Parliament" and "militated against constitutional propriety and the supremacy of Parliament".

IT is evident that the government charged ahead without taking note of legal norms and paying heed to democratic sentiments, parliamentary practices and popular sentiments on such a divisive issue. Ignoring the fact that the matter was already before the Supreme Court, the government went ahead with due diligence exercise at HPCL. Critics of the government have alleged that though the disinvestment move has been stalled, its rivals have already inspected the books and other records of the company. In particular, Reliance Industries, which is reported to be a serious contender for the company, had already completed due diligence at HPCL. Having completed due diligence, foreign companies such as British Petroleum and the Kuwait Oil Company are also privy to HPCL's commercial secrets.

It was reported that on the day the Supreme Court delivered its judgment, nearly 100 persons from the oil multinational Shell were inspecting the records at the data room of HPCL in New Delhi. Speaking to Frontline, Rajinder Sachar alleged that the government, by acting in haste, had seriously compromised the interests of the company.

Reflecting the divisions in the Union Cabinet, the reactions of the two protagonists in the ongoing disinvestment drama were a study in contrast. Ram Naik termed the judgment as "historic" and quickly announced that the three state-run oil and gas companies - the Indian Oil Corporation, Oil and Natural Gas Corporation (ONGC) and the Gas Authority of India Limited (GAIL) - would not be privatised. He also suggested that ONGC take 26 per cent of HPCL's equity on "nomination basis". He said that this would enable the government to meet its disinvestment target, even if only on nominal terms, while enabling it to stay on the right side of the law.

Arun Shourie, in Berlin when the judgment was delivered, could not have disagreed more with his Cabinet colleague. He termed the judgment as "a major setback" and said that the CCD meeting scheduled for October 3 would review the situation. Recognising the scope of the far-reaching judgment, Shourie said that the implications could possibly affect the fate of several other companies ready for disinvestment.

Sachar said that the judgment reflected a simple legal dictum - that an action that is not legal if done directly cannot be done indirectly. He said that when the government moved Parliament to pass the legislation in the 1970s to enable the taking over the assets of the foreign oil companies, it did not do that so that the acquired assets could be passed on to a company like Reliance.

Therefore, if the law prohibited it then, the same law prohibits the sale of the company to a private entity today. Unless the statutes are changed or repealed, the government simply cannot transfer the assets of the two companies to a private entity."

Asked if he would interpret the ruling as "progressive", Sachar remarked: "Things are always to be seen in relative terms. At a time when judicial pronouncements question even the workers' right to strike, I suppose this can be called progressive."

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