BPCL: First on the chopping block

Bharat Petroleum Corporation Limited is the first to go on the chopping block

Faced with little choice but to mop up greater non-tax revenue, India is lining up strategic sale of blue-chip, and state-run companies. Bharat Petroleum Corporation Limited is the first to go on the chopping block. But the government’s aggressive disinvestment drive is bound to draw stringent opposition.

Operating four refineries at Mumbai in Maharashtra, Kochi in Kerala, Bina in Madhya Pradesh and Numaligarh in Assam with a combined capacity to convert 38.3 million tonnes of crude oil into fuel, BPCL has 15,078 petrol pumps and 6,004 LPG distributors to supply cooking gas to 140 million customers. The state run Bharat Petroleum Corporation Limited (BPCL) was awarded Maharatna status (Precious Gem) in 2017.

Then why is the Modi government adamant on selling the company? Is it making losses? Or is it a drain on the state exchequer? Is it badly managed? Well its none of these! On the contrary the company has earned INR 351.82 billion as profit during last five years. It has paid INR 196.03 billion as taxes. It has also paid a dividend of INR 89.55 billion. Then what is the compelling reason for the strategic sale? What will the government earn by selling it?

The current market value of BPCL is around INR 1,000 billion. By selling the 53.29 pc of controlling stake in BPCL at the current valuation, the government is expected to mop up around INR 564 billion. Whenever one sells the controlling stake it gets premium value.

Last year in its most expensive acquisition ever, Oil and Natural Gas Corp (ONGC) paid INR 369.15 billion to buy government’s entire 51.11 pc stake in Hindustan Petroleum Corp Ltd (HPCL). The premium charged was around 18 pc. By this yardstick the government may successfully mop around INR 650 billion by selling its controlling stakes.

One of the big reasons for putting the BPCL on the chopping block is that the government proposes to raise INR 1,005 billion from disinvestment in the current financial year. It had exceeded asset-sale targets of INR 1,000 billion in 2018 and INR 800 billion in 2019.

Secondly, the government revenue has dipped drastically. Take for instance the Goods and Services Tax (GST) collections dropped sharply to a 19-month low of INR 919.16 billion in September, mirroring a widening slowdown in economy triggered by shrinking consumer demand.

Last month the government had slashed the corporate tax rate to 22 pc from 30 pc for existing companies, and to 15 pc from 25 pc for new manufacturing companies. Including a surcharge and cess, the effective tax rate for existing companies would now come down to 25.17 pc from 35 pc. Companies can opt for the higher tax rates or the new ones. As a result the total revenue foregone due to the fiscal giveaways was a staggering INR 1,450 billion.

More than 12,600 workers in the INR 3,600 billion state-run oil major is up in arms against the government’s decision to privatise the profit-making public sector oil and gas company, warning that they are ready to take their protest to the streets. The reason for their protest is simple- with privatisation the new owners may indulge in massive retrenchment.

In 2003, when the then BJP-led National Democratic Alliance government headed by Prime Minister Atal Bihari Vajpayee was keen on privatising BPCL, as well as HPCL, the Supreme Court had ruled that the companies could only be privatised after Parliament amends a law it had previously passed to nationalise the two firms.

The Modi government had quietly repealed the legislation that had nationalised the company, overriding the obligation to seek parliamentary assent before selling it. The Repealing and Amending Act of 2016 had annulled 187 obsolete and redundant laws lying unnecessarily on the Statue-Book.

The DIPAM floating  Request For Proposal (RFP) inviting transactions, legal advisors, and asset valuers for divesting stakes in five public-sector undertakings (PSUs) — Bharat Petroleum Corporation (BPCL), Container Corporation of India (Concor), Shipping Corporation (SCI), and power companies THDC India and North Eastern Electric Power Corporation (NEEPCO) the Modi government is keen and clear with its vision and goal of disinvestment. It is yet to be seen whether government’s enthusiasm about disinvestment is shared by domestic and global investors.