The buzz about the Narendra Modi government's reformist credentials has just got a bit louder, but one cannot avoid experiencing a sense of deja vu.
The nature of the initiatives made and the instruments of reforms that have been used by the Modi government will inevitably remind you of what the Atal Bihari Vajpayee government
had mooted, though with some variations, more than a decade and a half ago, almost at the fag end of the last century.
Three weeks ago, the Modi government had approved the strategic divestment of Air India, a task that was entrusted to a ministerial group headed by Finance Minister Arun Jaitley. There was jubilation over what many saw in that decision — the government's desire to push ahead with reforms, including privatisation.
Even before such celebrations over the government's renewed reforms drive could be over, the Union Cabinet on Wednesday accorded an in-principle approval to the proposal of state-controlled upstream oil major, ONGC, buying 51 per cent equity stake in another state-controlled entity, HPCL, India's third largest oil marketing company.
Cut to 1999 and 2000 and it will become easy to understand why both the decisions taken in 2017 look like a rerun of the initiatives made by the Vajpayee government.
Air India sale
Spurred by recommendations of the Disinvestment
Commission (a body set up in 1996 to explore, among other things, options to privatise state-owned enterprises; it was dismantled in 2004), the government under Atal Bihari Vajpayee in 2000 examined the strategic sale of equity in Air India and Indian Airlines. Those were the days when Indian Airlines and Air India operated as two distinct corporate entities, only to be merged in 2007 and rechristened as Air India.
The Vajpayee government, with Yashwant Sinha as its finance minister, was serious about strategic disinvestment
in the two airlines and had even set up a new ministry for disinvestment
to expedite such sales. However, largely due to the absence of credible offers for acquiring the state-owned airlines and the government having second thoughts on the entire issue, the proposal did not make any headway. Eventually, the idea was dropped.
Seventeen years later, a period that saw Air India incur thousands of crores of more losses, necessitating the infusion of taxpayer’s money into its equity to keep it afloat, the Modi government, with Arun Jaitley as its finance minister, has once again begun the task of finding a strategic buyer for the beleaguered airline.
It is a rerun of a 17-year-old story, with the only difference being that this time perhaps, potential buyers are more serious and willing to make a bid but only if the government meets some of their conditions on the way Air India’s assets and liabilities should be bifurcated before the eventual sell-off. Given the airline’s huge liabilities and its oversized workforce, it will be a difficult challenge for the Jaitley-led ministerial panel to conclude the deal.
Only time will tell if the Modi government can break this logjam or whether history will repeat itself.
The decision to allow ONGC to acquire a majority stake in HPCL also has a ring of the past. Once again, it was the Vajpayee government that had explored the innovative option of cross-purchase of shares of oil companies – ONGC, Indian Oil Corporation (IOC), and GAIL.
In the space of less than two years, between 1999 and 2000, the Vajpayee government had asked these three oil companies to purchase the government-owned equity shares of each other. This was an idea mooted by the then Finance Secretary Vijay L Kelkar and endorsed by the then Finance Minister Yashwant Sinha.
Thus, ONGC bought 9.1 per cent shares in IOC and 4.8 per cent shares in GAIL. Similarly, IOC bought 9.6 per cent shares in ONGC and 4.8 per cent shares in GAIL. GAIL, for its part, bought 2.4 per cent shares in ONGC. All the shares that these three companies bought from each other were owned by the government and all the companies used their own resources to buy these shares. At the end of this exercise, the government’s disinvestment
receipts were boosted by Rs 4,643 crore — of which, Rs 4,184 crore were booked in 1998-99 and Rs 459 crore in 1999-2000.
By today’s yardstick, these amounts may look relatively small. However, government receipts from cross-purchases of oil companies’ shares accounted for over three-fourths of its total disinvestment
revenue of Rs 5,371 crore in 1998-99 and a little less at about a fourth of the total disinvestment
proceeds of Rs 1,860 crore in 1999-2000.
What the Modi government decided on Wednesday is somewhat similar as its decision allowing ONGC to buy 51 per cent equity share in HPCL will likely fetch it a disinvestment
receipt of about Rs 30,000 crore at current market prices. This would be over 40 per cent of the government’s target of disinvestment
revenues for 2017-18.
Make no mistake about this. As of now, ONGC’s purchase of a majority stake in HPCL benefits the Union government by way of boosting its disinvestment
receipts the same way the Vajpayee government’s cross-purchase of shares in three oil companies had benefited it. And just like then, even now, the government’s fiscal deficit target will be met with the budgeted disinvestment
proceeds flowing in as ONGC will buy these shares using its own resources.
The only difference is that while the Vajpayee-era share purchases did not result in any ownership change in the oil companies, the decision now would result in HPCL becoming a subsidiary of ONGC. That is, of course, a big difference as immense possibilities can arise out of this share acquisition by ONGC. For instance, ONGC could merge in itself HPCL and along with that its other existing subsidiary, MRPL. That could make it an oil sector behemoth, enhancing its financial clout and strengthening its market presence in all the segments of the oil vertical — exploration, refining and retail marketing of oil products.
But the eventual merger of these companies would raise two pertinent questions. One, will the minority shareholders of HPCL be short-changed? It seems that ONGC would be exempted from the requirement of making a mandatory open offer in share transfer in excess of 25 per cent of the equity base of a company. Such exemptions are not unusual but will be keenly watched as this might set a precedent for eventual strategic sales of other state-owned enterprises, including Air India in the coming months.
Two, what would be the control premium that the government would charge from ONGC before handing over its majority stake in HPCL? The price at which ONGC eventually acquires the 51 per cent stake in HPCL must include a control premium element. The government did get a control premium before the majority control of Maruti Udyog was transferred from itself to Suzuki Motor Corporation of Japan. It would be argued that since the government continues to be the promoter and majority stake holder in ONGC, there is no need for a control premium. However, HPCL and ONGC are two different companies and there will be an ownership change and the government cannot deprive itself of a control premium from its majority stake sale.
The imprint of the Vajpayee government’s initiatives on what the Modi government unveiled in the last three weeks is significant for another reason. In recent months, the Modi government has often been accused of repackaging some of the policies that were earlier rolled out, though by a different name, by the previous government led by Manmohan Singh under the United Progressive Alliance (UPA) — the direct benefits transfer scheme, Aadhaar, smart cities project, etc.
However, the initiatives on privatisation or cross-purchase of shares are all ideas that were launched by the Vajpayee government and the Modi government can claim that these are ideas that it did not borrow from the UPA.
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.