LEADER ARTICLE
Selling the Family Silver | Opinion Split on Splitting IOC

The recent decision of the Cabinet Committee on Disinvestment to consider a proposal to split up the country’s single largest corporate entity, the public sector Indian Oil Corporation, is extremely ill-conceived. The decision appears to be a knee-jerk reaction to the September 16 Supreme Court judgment restraining the Union government from going ahead with the privatisation of IOC''s smaller sibling, Hindustan Petroleum Corporation Limited, without obtaining the prior approval of Parliament.
There are many good reasons why IOC should remain a single company and, in fact, should be strengthened and perhaps made bigger. Despite the nebulous logic to justify breaking up IOC and privatising its marketing arm, if, in fact, the government succeeds in handing over the company’s marketing facilities to a private corporate group, it would have damaged irreparably a public sector undertaking that is one of the few Indian companies which can compete effectively at an international level.
The move to split IOC should be resisted even if one is convinced the petroleum industry is not strategic in nature, that too in a country which currently imports close to three-fourths of its requirements of crude oil and petroleum products. The attempt to cut IOC down to size is especially puzzling because oil companies the world over are merging and amalgamating to become bigger.
By integrating upstream and downstream activities, a large oil company is able to insulate itself better against price volatility and supply uncertainty. IOC is not merely the only Indian company that figures in the list of top 500 companies outside the US compiled by Fortune magazine every year.
It is also among the top 20 petroleum companies in the world. IOC’s turnover during the last financial year came close to Rs 1,20,000 crore — it paid the government a dividend of 290 per cent on its equity capital. As one commentator put it: To vivisect it (IOC) now will be an act of corporate murder of an adolescent on the point of attaining manhood.
Former finance secretary Vijay Kelkar had staunchly advocated equity swaps and cross-holdings between IOC and the Oil and Natural Gas Corporation as a means of garnering budgetary resources. He had argued at one stage that the coming toge- ther of these two PSUs which also happened to be the two largest corporate entities in the country would bring about greater synergy and could even result in the formation of India’s only global corporate giant.
Mr Kelkar’s views on splitting IOC are not known. But by seeking to break up IOC and then privatising its marketing facilities, the Union government would be going back on its own decision not to privatise particular PSUs like IOC and ONGC.
Many argue that a company like IOC which controls roughly half the Indian retail market for petroleum products has performed as well as it has because it was in a position to earn monopoly profits. This may have been true when the administered pricing mechanism was in place and till the time IOC monopolised oil imports. In recent years, however, the environment has undergone a sea-change. No company, including multinational corporations, is today legally barred from importing oil. In marketing, IOC continues to compete with its siblings, HPCL and Bharat Petroleum Corporation Limited. In refining, IOC has to vie with the Reliance group, which has set up one of the largest oil refineries in India and Asia although it is yet to establish its own marketing infrastructure.
The marketing facilities of IOC, HPCL and BPCL are eyed by private players simply because these are located at prime locations. Such facilities would include many of the tens of thousands of petrol pumps owned and operated by these PSUs. Similar facilities cannot be created, certainly not in a hurry, even if large sums of money are utilised.
So why does the government want to dismantle a company which it has itself described as a navaratna? A section of the ruling BJP may want the ownership of the country’s crown jewels to be transferred to private hands. But there are large sections within the BJP and the NDA, not to mention the political class as a whole, that do not go along with such a myopic strategy of bridging the government’s budget deficit.
After IOC successfully acquired managerial control over IBP Limited (formerly Indo-Burma Petroleum) in January, the government clarified that one PSU should not be allowed to acquire the shares of another PSU as this would not be real privatisation. If the government is indeed keen on raising resources, it should seriously consider the offer made by the IOC management to acquire the shares of HPCL for a sum of Rs 10,000 crore. This would cover the anticipated shortfall in receipts from divestment during the current financial year. But then, the government would also have publicly to acknowledge that the privatisation methodology it has been following so far is seriously flawed.
If the government is unhappy that the Supreme Court has disallowed it from privatising HPCL without seeking the prior approval of Parliament since the company had been set up by an Act of Parliament taking over the assets of foreign oil companies, it should not vent its ire on IOC on which there are no legal restraints on privatisation.