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Home / Companies / News /  Why BPCL could be a turning point for India’s disinvestment program

After four extensions, the government last week closed the first step in the process to privatise oil marketer Bharat Petroleum Corporation Limited (BPCL). The response was unflattering. Nothing from Reliance, Total, Aramco or BP. The government said it received “multiple" expressions of interest (EOIs) without naming them, with mining major Vedanta confirming it was one.

The sale of BPCL is pivotal for the government. One, the 40,000 crore or so it is expected to fetch would help the government do something about its disinvestment target of 2,10,000 crore, or about 7% of its total projected revenues for 2020-21. Given the pandemic blow to tax revenues, disinvestment proceeds become even more vital. Two, the government was looking at BPCL as a rare instance of a public sector undertaking (PSU) being sold to a private player, paving the way for more privatization. Speaking to industry leaders on Monday, the finance minister, Niramala Sitharaman, promised to accelerate privatization of state-owned firms in the coming days.


The government needs the private sector to revive the disinvestment momentum. In terms of collections, 2017-18 was the big year, with proceeds crossing 1,00,000 crore for the first time. Collections tapered in the following two years and have evaporated this year.


If the disinvestment strategy of the Congress-led UPA was to sell minority stakes in PSUs, this BJP-led NDA government also started selling majority stakes in PSUs that were not of strategic interest. But these were not sold to private entities. Instead, these were sold to—or foisted on—other PSUs. So, for example, ONGC bought the government’s stake in HPCL, for 36,915 crore. Similarly, Power Finance Corporation bought the government stake in Rural Electrification Corporation for 14,500 crore. Such inter-PSU transfers played a big part in the three big disinvestment years.


With such inter-PSU transfers, the Centre meets its short-term objective of raising more funds for itself. But whether such transfers contribute towards the long-term objective of unlocking value in PSUs is questionable. Given the imperative to raise funds, the easy option is to sell PSUs to fellow cash-rich PSUs, whether there are synergies or not.

The proposed BPCL sale is different. From the outset, the government said it would sell its 53% in BPCL only to a private player. Thus, neither of the other two PSU refiners, IOC and ONGC, submitted EOIs. On November 18, responding to a news article, the government official handling the disinvestment clarified in a tweet that PSUs could not bid for BPCL.

Other than BPCL, there are 19 more PSUs, or parts of them, for which the government has given in-principle approval for disinvestment. This includes businesses like Container Corporation of India, Bharat Earth Movers and Shipping Corporation of India. None, though, match up to BPCL, India’s second-largest PSU by revenues in 2018-19.


This is not the first time a government is trying to sell BPCL. The Atal Vajpayee-led NDA government (1999-2004), too, had expressed intent. That government is the only one so far that has sold majority stakes in PSUs to private players. It did so in a range of sectors, including mining (Balco and Hindustan Zinc), oil refining (IBP), petrochemicals (IPCL), telecom (VSNL) and IT (CMC).

Most of these PSUs have since been merged into the company that bought them, and have ceased to exist as a listed entity. Hindustan Zinc—which was bought by Sterlite, a Vedanta Group company—is one that is still listed. Its performance is illustrative of the potential of disinvestment.

A sum of 100 invested in Hindustan Zinc in August 2002, when it was sold, is today worth 50,745—a compounded annual return of 41%, against 16% delivered by the bellwether BSE Sensex. Around that time, even BPCL and HPCL were in the long list to be sold. Their sale never got underway. And though they have both beaten the bellwether BSE Sensex in returns since, their gap to Hindustan Zinc is enormous.


While both partial and full privatization are useful, performance improvements are “significantly and positively related" to the fraction of equity sold, wrote Nandini Gupta, associate professor of finance at Kelley at Indiana University's Kelley School of Business in a 2011 research paper.

“Compared to partially privatised firms, sales and returns to sales increase by 23% and 21%, respectively, on average when firms sell majority equity stakes and transfer management control to private owners," wrote Gupta, who has extensively researched this issue in the Indian context.

Two decades ago, as India battled industrial stagnation and economic slowdown in the wake of the Asian crisis of 1997, the Vajpayee government used the privatization drive to raise government revenues and lend more dynamism to the Indian economy. It remains to be seen if the Modi government can do the same in the wake of another crisis. BPCL will be a test case.

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