Public sector does the rescue act

Troubled public-sector assets now have a new saviour: other cash-rich public sector undertakings. With state-owned companies, this seems to be the chosen way forward.

Thus, ONGC announced in December that it will buy Gujarat State Petroleum Corporation’s 80 per cent stake in the Deen Dayal Upadhyay  West field and six other finds in the KG Basin for $1.2 billion.  More recently, National Thermal Power Corporation agreed to take over Rajasthan government’s Chhabra thermal power plant in an equity-for-asset deal.

Both the bail-outs, incidentally, are of assets that happen to be based in BJP-ruled states.

GSPC incurred debt of over Rs 20,000 crore on account of the Deen Dayal block. Though GSPC will not be able to retire even half of its debt after the sale to ONGC, the deal was clearly triggered by the gas block not fetching the desired yield and consequent anxiety on the part of lenders.

In the case of Chhabra, the plant was losing about Rs 295 crore annually, thanks in a large part to the debt of almost  Rs 9,000 crore on its books. It is expected that after NTPC takes over the project, which upon completion of second stage will have six units, the annual loss will come down as the PSU will be able to access low-cost funds.

NTPC, the country’s biggest power generator, has twice in the past drawn up plans to take over other power plants and even called for expressions of interest. The plan was dropped because the plants came with their own set of problems related to loans, land and power purchase agreements.

"Just because a company is in a desperate situation does not mean it does not make commercial sense for another company to buy it” DK Sarraf, Chairman & Managing Director, ONGC

The two sell-offs took different courses. Rajasthan government’s Rajya Vidyut Utpadan Nigam invited global bids for the Chhabra plant in August but with little appetite left in private companies, it became impossible to find a buyer. NTPC predictably agreed to bail out the state government.

For GSPC, there was no such invitation of bids. In an interview after the deal, GSPC Managing Director JN Singh said the company “didn’t have deep pockets to go ahead in the K-G basin. It is, therefore, in the national interest that we are going ahead with ONGC which is best suited to undertake such exploration work.”

PSUs have a say

Is it that selling troubled assets to another PSU is a safe bet as it rules out charges of cronyism and corruption? The Narendra Modi government seems extremely weary of being seen as a “suit boot ki sarkar”. “Though this is correct, PSUs are board-run companies and the government cannot force them (to take a decision),” says a senior executive in one of the country’s biggest PSUs. Any takeover has to be approved by the board of directors.

The GSPC deal, for instance, was much debated by the ONGC board like any other big decisions that the company takes, says a person privy to the board’s meetings. Defending the company’s decision, ONGC Chairman & Managing Director DK Sarraf told Business Standard: “Just because a company is in a desperate situation does not mean it does not make commercial sense for another company to buy it.”

Indeed, PSUs are known to put their foot down if an unviable decision is forced on them.

In August 2011, the Cabinet Committee on Economic Affairs had approved a draft rehabilitation scheme for revival of all the units of Fertiliser Corporation of India and Hindustan Fertilizer Corporation. Steel Authority of India (SAIL) was chosen to revive the Sindri unit of Fertiliser Corporation of India.

SAIL had promptly incorporated a wholly owned subsidiary SAIL-Sindri Projects in November 2011 for this purpose. But soon it found out that out of a total land of 6,652 acres with Fertiliser Corporation of India at Sindri, only 498 acres, the area of the existing fertiliser plant, were encroachment-free and contiguous.  In addition, it saw no synergies between steel and fertiliser. It put forth its views to the government, which allowed it to opt out of the plan.

In July last year, the Union Cabinet approved another revival plan for the defunct fertiliser units of Fertilizer Corporation of India at Sindri in Jharkhand and Gorakhpur in Uttar Pradesh and Hindustan Fertiliser’s Barauni plant in Bihar. The three fertilisers units will now be revived by a special purpose vehicle floated by NTPC, Coal India, Indian Oil Corporation and either Fertiliser Corporation of India or Hindustan Fertiliser, through the ‘nomination route’.

In 2015, too, the government had approved revival of these three units through the ‘bidding route’. “However, the bidding process could not be carried forward due to the receipt of only one application each against ‘request for qualifications’ for the Gorakhpur and Sindri units,” said a government statement of July 13, 2016. In other words, there wasn’t enough private sector interest for these assets.

A lot riding on the plants

In the government’s scheme of things, the revival of these units is vital. According to the July statement, the fertiliser units at Sindri, Gorakhpur and Barauni will meet the growing demand for urea in Bihar, West Bengal and Jharkhand. It will also ease the pressure on the rail and road infrastructure, as these markets are not being fed from fertiliser factories in central and western India. The revival is expected to create direct employment for 1,200 and indirect employment for 4,500 people.

These units were lying defunct since their closure between 1990 and 2002. The move to revive them has been prompted by the fact that there is no functional urea unit in the eastern part of the country except two small units at Namrup in Assam. The annual consumption of urea in the country is around 3.2 million tonne, out of which a quarter is imported.

Such takeovers by PSUs suit the lenders too, who can hope to recover their loans. “If PSUs do not bail (the sick units) out, banks will have to,” says a former bureaucrat who has been involved with restructuring of troubled companies.

The government has meanwhile decided to do strategic sale in two pharmaceutical PSUs: Hindustan Antibiotics and Bengal Chemicals & Pharmaceuticals. It will be interesting to see where these two units end up.

Deals in the works
* ONGC to buy Gujarat State Petroleum Corporation’s 80 per cent stake in the Deen Dayal Upadhyay  West field

* NTPC to take over Rajasthan government’s Chhabra thermal power plant

* An SPV of NTPC, Coal India, Indian Oil Corporation and others to come to the rescue of Fertilizer Corporation of India’s plants