Look at a holding company structure, not a mega oil firm

Instead of the proposed mega oil company, the govt could look at setting up a holding company

The government will create a mega oil company as part of its plan to consolidate public sector companies. The proposal of merging 13 government oil companies, which had stemmed out of the Cabinet Secretariat last year but did not find takers in the ministry of petroleum, is now back on the agenda.

“We see opportunities to strengthen our central public sector undertakings through consolidation, mergers and acquisitions... Possibilities of such restructuring are visible in the oil and gas sector. We propose to create an integrated public sector ‘oil major’ which will be able to match the performance of international and domestic private sector oil and gas companies,” said Finance Minister Arun Jaitley in his Budget speech.

He said that the CPSEs could be integrated across the value chain of an industry, which would give them “capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders”. But, for reasons ranging from the managerial to employee management and legal, any attempt to execute the idea could see a long-drawn process involving legislative changes as well. Even an indomitable Mani Shankar Aiyar had to beat a retreat on this proposal, ostensibly on the recommendations of V Krishanamurthy’s Synergy in Energy panel in 2005.

Since then, the business character of PSUs has undergone a lot of changes. The companies are larger, more diverse, vertically integrated in operations and with overseas presence as well, which could add to complexities. Besides, China, with which India competes in the hydrocarbon sector, has a host of state-owned companies that specialise in different aspect of the oil business.

One of the key requirements would be the legislative changes needed to alter the structure of Hindustan Petroleum Corporation and Bharat Petroleum Corporation, which were nationalised through a law approved by Parliament.

A procedural requirement would also be needed to go through the regulatory rigours required for listed companies. While this process may not itself take much time since clearances from various departments can be sped up once the government decides on such a course, a merged entity will leave little headroom for future disinvestment by the Centre.

A regulatory hurdle could, however, come from the Competition Commission of India (CCI). Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation among themselves control more than 90 per cent of the domestic market for petroleum products. Their merger would mean a single entity controlling the mammoth market even if different brands are retained. In other words, a monopoly would be created. These companies have had run-ins with the CCI on cartelisation earlier, too, with respect to supply of ATF tenders at the airports and diesel tenders for the Indian Railways.

The only window available to the government is a little-used provision in the Competition Act which allows it to exempt enterprises from the competition law in “public interest” and “national security”. Though in this case, the use of Section 54 under the Act can easily be questioned.

The one positive that could emerge from the merger is neutralising the current risks in the oil market. With climate change concerns limiting the use of hydrocarbons to a large extent, an oil producing company like Oil and Natural Gas Corporation can benefit from being part of a mega company that is also in the business of refining, retailing and even green energy.

The model which the government could find easier to follow is creating a holding company with all the 13 as its subsidiaries. This could smoothen the often conflicting efforts of the constituents or forge a united front whenever required. Such a holding company could be listed at a much greater valuation like Coal India or Steel Authority of India even as the subsidiaries could remain listed too. The alternative is to create a holding company that remains unlisted till the teething issues are resolved.

Synergy in Energy: What V Krishnamurthy Panel Said

Merger of Oil PSUs or formation of holding company not advisable as on now

Empower Director General of Hydrocarbons as autonomous body with its own cadre

Create a parallel overseas arm of Oil India Limited to bid for small blocks

Create National Shareholding Trust, modelled after Singapore's Temasek, Malaysia's Khazanah

Trust to function as non-profit entity and comprise government, PSU and private sector representatives