I. Background to the decision to disinvest by the Government of India
The Government of India ("GoI") had, in November 2019, lined up the sale of five (5) public sector units' ("PSUs") stakes, including its 52.98 per cent stake (114.91 crore equity shares) in blue chip oil company Bharat Petroleum Corporation Limited ("BPCL") and accordingly, sought Expressions of Interest ("EOIs") from potential acquirers by July 31, 2020. The actual sell-off would obviously depend upon the market once all EOIs had been received. In a nutshell, BPCL has agreed to give its buyers ready access to 15.3 per cent of India's oil refining capacity and 22 per cent of the fuel market share in the country. It is pertinent to sync this with the fact that BPCL, as in June 2020, stood at a market capitalisation of about INR 85,316 crores and the GOI's stake proportionately stood at approximately INR 45,200 crores. The successful bidder will also have to make an open offer to other shareholders for acquiring another 26 per cent at the same price.
The deal for privatisation of GOI's stakes in BPCL is critical for meeting the record INR 2.1 lakh crore target that the finance minister has set for the disinvestment proceeds in the budget for 2020-21. However, despite this offer being a good takeover target for private corporations, the company acquisition plan had to be postponed on four (4) occasions since March 2020. The most obvious concern at this point is that the pandemic does not result in distress sale of this valuable government asset.
II. Why BPCL could be a turning point for GOIs disinvestment program
The sale of the majority stake in BPCL is critical for GoI primarily due to two parallelly drawn reasons. Firstly, the sum of INR 40,000 crore that the transaction seeks to fetch would play a pivotal role in helping GoI to do something about its disinvestment target of INR 2.1 crores, that is about 7% of its total projected revenues for 2020-21. In fact, taking into consideration the impact that the pandemic has had on tax revenues, these disinvestment proceeds become all the more vital for the economy. Secondly, the GoI has illustrated this disinvestment of BPCL as a rather big example of a major transaction that paves way for more privatisation in the Indian economy, as also promised by the finance minister on a number of occasions.
In fact, two decades ago as India was battling through industrial stagnation and economic slowdown in 1997, the Vajpayee government also sought privatisation as a means of raising government revenues and extend more dynamism to the Indian economy. It now remains to be seen if the current Modi government can give similar or hopefully better results in the wake of another crisis, being the coronavirus pandemic.
III. 'Adequate interest' towards the BPCL disinvestment
The GoI has very confidently taken a stand that 'adequate interest' has been received towards the BPCL disinvestment strategy, with 'several suitors' expressing their interest in it. At this point, it is also worth mentioning that the current bids for BPCL have barred the participation of public sector undertakings, and therefore, only private sector undertakings can participate.
It was only recently, in November 2020, that the Vedanta group confirmed that it had submitted an EoI to acquire the government's stake in BPCL. Vedanta, being the holding company of Cairn India, accounts for around a quarter of India's annual crude oil output. The official spokesperson of Vedanta explained that, "Vedanta's EoI for BPCL is to evaluate potential synergies with the existing oil and gas business".
However, industry giants such as Reliance or even international big players like Aramco, BP and Total have not participated in the bid. In fact, Reliance, which was considered as one of the primary potential bidders did not put an EoI at the close of the deadline. None of the major international oil companies-who are actively seeking to enter the Indian energy market, showed interest either. Another energy giant being Russia's Rosneft-led Nayara Energy, which operates a 20 million tonne oil refinery in Vadinar in Gujarat, was expected as a potential bidder, but reports earlier on indicated that it was no longer keen to move ahead with it. The fact that the response received from potential oil giants was not even close to what expected by the GoI for the BPCL deal, the deadline to submit bids was extended on four (4) occasions. Finally, last month, GoI announced that this deadline will not be extended for the fifth time. The government stays put on the idea of closing the sale of its stake in BPCL before March 31, 2021to help meet the targets set for the 2020-21 budget. While the government had at the close of bidding stated that 'multiple' EOIs had been received, it however, did not reveal the identity of the bidders.
The GoI, which at this point is in desperate need of funds to finance welfare schemes and bridge a fiscal deficit that has already surpassed the annual target, had aimed to raise USD 8-10 billion though the BPCL sale. However, BPCL's share price has plunged nearly 30% over the past year. One of the most obvious reasons behind this shortfall in receipt of bids for BPCL, is the worldwide hit of coronavirus and the resulting economic slowdown. Quite naturally, this is just not the time to invest in refining, and as a directly proportionate result, it is very unlikely that GoI would attract the deserved price for its stake in BPCL due to the current environment.
India today faces a steep decline in government revenues and economic progression due to the outbreak of Covid-19. Slowdown in consumption, curbs on travel and other restrictions pose a dramatic threat to sustainability of various businesses. While the current natural calamity may not affect all fragments of an industry, the fact that it will affect certain aspects of operations in some way or the other, the whole chain stands at the risk of being blocked. Even if we keep the scenario in India aside for a moment, the situation is similar or worse in other foreign economies that deal with India directly and carry operations with Indian companies.
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