Self-defeating safeguards

BS OPINION

A few days ago, the Prime Minister took National Aluminium (Nalco) off the list of undertakings to be privatised. Now, the government is doing more back-pedalling, on the sale of Hindustan Petroleum Corporation (HPCL) and the Shipping Corporation of India (SCI).

In HPCL, a golden share is to be introduced to give the government veto rights. And in SCI, the government seeks to insert a clause that will allow it to buy back the company at half the disinvestments price in case it is suspicious about the new owners' sources of funds.

Both measures seem designed to address concerns about large companies in strategic sectors falling into undesirable hands. This may be understandable, given the ease with which critics and lobbyists can derail privatisation.

Nevertheless, the questions are obvious. Why accept any bid for SCI if the government thinks the new owners are not kosher? The leading companies in the shipping business are well known, and so are their antecedents.

Isn't it simpler to have a screening process to shortlist approved bidders? That process would fetch the government a better sale price than one in which a draconian buyback clause is part of the sale agreement.

Such a clause can only drop SCI's value in any buyer's mind, because it raises the risk of ownership. At the very least, a buyer would expect that a forced sale back to the government should be at fair market value.

In the case of HPCL, there is the defence that the disinvestment ministry wants to prevent a repetition of the VSNL episode, where the then telecom minister said the Tatas investing VSNL money in group telecom companies amounted to asset stripping.

But a simpler solution would be to remove in advance all surplus cash from the company, or to create a separate company for surplus land "" as was done in VSNL.

To have a veto on selling assets, venturing into a new line of business, shutting shop and so on, is a sure way of ensuring that the strategic partner for HPCL will have to cosy up to the petroleum ministry.

Once again, the loser will be the government because such conditions will make the company less attractive to potential buyers.

Golden shares are understandable early in a disinvestment process, to calm jittery sellers who are wary of private investors, and to retain a say on critical issues in a few public sector undertakings of vital national importance.

But the oil sector does not present a hairy picture to even the paranoid. The government has already decided that at least one oil company will be retained under government ownership.

So, ONGC (the leader in oil exploration), Indian Oil (the biggest oil marketer) and the Gas Authority of India (the dominant player in its field) are not to be sold.

This should be enough to ensure that the government retains both strategic reserves and also the market power to discipline private sector players, should they decide to get clever.

Once this is done, the decks should be clear for the sale of HPCL and Bharat Petroleum Corporation (BPCL). But the government will remain the largest shareholder in BPCL even after its shares are sold to the general public.

In other words, true privatisation will take place only in HPCL, and the energy sector will remain predominantly in government hands. Why then the nervousness?