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Wednesday, October 08, 2003

A few weeks back I talked about the stalled divestment of HPCL. Things have gotten more confused since then.

Since then GOI had floated the the idea of splitting Indian Oil Corporation (IOC) into two or three different entities and selling off their retail arm. IOC is India's only Fortune 500 company. IOC obviously did not like the idea one bit. They have since offered to take HPCL off the government's hand in order to let them meet their divestment targets. This is probably a slightly better suggestion. Business Standard rightly noted in today's editorial:

"Even on the face of it, the government's decision to split Indian Oil Corporation (IOC) into two parts, and sell off around half its marketing outlets, if it is not possible for it to sell off Hindustan Petroleum (HPCL), is a classic case of the cure being worse than the ailment — the ailment in the current case being the Supreme Court's ruling that neither HPCL nor BPCL could be sold without prior permission of Parliament.

For, the retail outlets account for roughly 40-45 per cent of not just IOC's profits, but those of any refining-cum-marketing outfit like even HPCL and BPCL.

Cut off this vital arm, and it is not just the profits, but a significant part of IOC's viability that is under a shadow — from where, then, is it to sell the output that comes out of the eight refineries it owns?

It is in fact this very realization, that stand-alone refineries are not viable without an accompanying retail distribution network, that led the government to set up the Nitish Sengupta committee in 1999 which recommended that the four stand-alone refineries like Madras Refineries and Bongaigaon be merged with retail firms like IOC and BPCL. After the Sengupta recommendations, in fact, these refineries were merged.

It is, of course, true that the Supreme Court's ruling is debatable, especially since we've seen just what happens when a company with such large resources is left at the mercy of the country's politicians — the petrol pump scam is the most obvious manifestation of the evil that results.

But, like it or not, this is something the disinvestment ministry, and the entire country, will have to deal with in the correct manner, that is by approaching the Court once again, and if that fails, by approaching Parliament.

The decision to simply break up a well-run firm, sell off one part and then merge the other with either HPCL or BPCL (or both!) to create a completely unwieldy structure is a very sad reflection of the completely cavalier manner in which such vital economic decisions are taken.

Read the history of any merger/demerger in the corporate world, and it'll be obvious that it takes months, if not years, of careful planning and execution to carry off a successful exercise — it's not done with just the stroke of a pen, or with a few wise men meeting over a table."

Rediff has a very good resource for tracking the divestment story.

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