Indian privatization has no more ardent a campaigner than Arun Shourie, the minister in charge of privatization, and no more determined a foe than Ram Naik, the minister for petroleum and gas.
That they are not only members of the same government but also the same party – the Bharatiya Janata Party – is a measure of how deeply divided India’s politicians are over the issue of privatization.
In August, Naik came under fire after reports that most of the 3,000 petrol pump dealer licences handed out by the petroleum ministry went to family and friends of members of his party. Public outrage prompted the government to cancel the orders and parliament was hurriedly adjourned.
At first this seemed a clear victory for privatization. The sale of the two big petroleum refining and marketing companies, Hindustan Petroleum (HP) and Bharat Petroleum (BP), stalled by Naik, could now go ahead.
Damages
However, on August 28, the Supreme Court stayed the government order cancelling petrol dealerships until early November when the suits filed against the order will be heard.
Shourie insists that the litigation will not affect the privatization of HP and BP, pointing out that a state hotel company privatized early this year had 339 suits filed against it. Any damages that might result from the litigation can be treated as a contingent liability and discounted by the buyer, Shourie argues. The government is also considering an ordinance that will forestall further litigation on the issue.
Bankers are divided about the state of affairs. Ashit Kothari, an analyst at ASK Raymond James, a US investment bank, says: “The dealerships are vital to the valuation of these companies. The buyer is paying for the time and cost of setting up a large distribution network. HP has 4,500 dealerships; if a tenth to a fifth of them are cancelled, it is a serious problem.”
Shanti Ekambaram, senior vice president at Kotak Mahindra Capital, says: “The assets are very attractive and no foreign oil major looking to enter the Indian market will want to pass them up.” Kotak advised the government on the sale of Maruti, India’s biggest car manufacturer, to Suzuki early this year.
HP and BP are the most valuable state assets to go on the block this year. The deregulation of the petroleum and oil sector is expected to push up refining and marketing margins. HP’s market capitalization is just over $2 billion and BP’s $1.8 billion.
Assuming that buyers contemplate buying close to half the shares from the government and from minority shareholders (the buyer must offer to buy 20% shares from the market under India’s takeover rules), the deals are likely to be worth around $1.5 billion to $2 billion. “These are large outlays even for foreign oil majors,” says K Balakrishnan, head of corporate finance at HSBC Securities, which advised on the sale of Indo British Petroleum earlier this year. Large enough for foreign investors to worry about the threat of an India-Pakistan war.
If the response from foreign investors to privatization sales has been tepid, it is because government policy has not seemed encouraging. Only two companies are in the race for Shipping Corporation. And both are Indian – most foreign companies held back because of a 26% cap on foreign ownership.
The IBP sale raised concerns about price. Some believe that state oil major Indian Oil Corporation overpaid for IBP, raising the benchmark price for bigger companies such as HP and BP. Other bids for IBP, including ones by Royal Dutch/Shell and Kuwait Petroleum, were much lower.
Soon after, the government ruled that IOC could not bid for BP or HP, keeping the interest of investors alive in those deals.
But Oil and Natural Gas Corporation, another large state company that recently acquired a private refining company, is expected to make a bid for them.
The cabinet committee on disinvestment will take a decision soon on the sale of both companies. Bankers say that oil and gas majors including Shell, British Petroleum, Exxon Mobil Caltex, Petronas and TotalFinaElf could be among the bidders.
Another big deal lined up for this year is National Aluminium (Nalco), an aluminium major with market capitalization of $1.4 billion. The government is looking to sell 60% of its 87% stake in a three-part deal involving an international and domestic flotation and a strategic sale. ABN Amro and Enam Securities are the global advisers to the deal. Expressions of interest for the sale of a 29% stake in the company have come from Pechiney, which is a technology supplier to Nalco, BHP, Hindalco, an Indian aluminium company that controls 40% of the local market, and US company Alcon.
The Nalco sale promises to be politically challenging, and a test of Shourie’s persuasive skills. A chief minister of the state where the company has its operations, who is an ally of the ruling coalition, is opposed to its privatization, as are a section of its workers.
