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IPCL Disinvestment By Prabir Purkayastha
Saturday, 29 March 2008 00:00

The current disinvestment proposal of the Union Government is a change from the earlier Nehruvian vision of self-reliance to the more limited one of Reliance. Only this explains the Government’s decision to sell off 25% of the equity of IPCL -- declared as a navaratna in 1997 -- to a “strategic” partner. In the last round of bidding, it was clear that Reliance was the most likely candidate as the strategic partner, a scenario unlikely to change by hiking off the Baroda plant of IPCL and selling it to Indian Oil.

IPCL was set up in 1969 to provide vital raw materials for the Indian industry. Till Reliance entered this area, it was virtually the sole supplier.

If Reliance takes over the unit, a recent internal study of the Government indicates that Reliance will have a total monopoly in a number of basic materials required by the industry. It was for this reason that the Disinvestment Commission had suggested a basic safeguard (Report VII, pp 204): “ … care should be taken, while pre-qualifying bidders, to ensure that strategic sales do not lead to market dominance by a single player”. Yet, from the statements issued by the Shri Dhindsa, the Chemicals and Fertiliser Minister clearly Reliance is very much a player in this game.

The government is fostering a number of myths to justify its disinvestment programme. One is that even in the current period, it has invested more than it has gained as dividend: the Plan outlay on PSUs has been Rs. 222,671.76 crore from 1992-93 to 1998-99. The Working Group on Disinvestments, an independent expert body, (Issues in Public Sector Disinvestment, 2000) has shown that the budgetary support for this outlay was a mere Rs. 27,545.61 crore. The remaining Rs. 1,95,126.15 crore has been raised by the PSUs through a combination of their own internal resources and their borrowings in roughly equal proportions. What is more, even the budgetary support of a little over Rs. 27,500 crore is helped in no small measure by the dividend payments of Rs. 16,838 crore made by the PSUs over the same period.

Even the figure that the government regularly trots out of Rs.200,000 crore invested in PSUs over the years is fudged as it lumps equity with loans. The total equity put in (till 1997-98) was Rs. 64,668 crore; the rest are loans that have been largely paid back. As against this, even by the most conservative estimates, the asset value of just the top 10 PSUs is more than Rs.500,000 crore. Obviously, the capital ploughed back into the PSUs enhance their asset value and have to be taken into account while talking about the poor returns from the public sector.

The IPCL case makes the above even clearer. IPCL has a total equity of Rs. 249 crore. As against this investment, its assets at market value is 40 times: a whopping Rs. 10,000 crore; even its free reserves are of the order of Rs.3,000 crore.

The case of the IPCL disinvestment brings out the other fallacies in the scheme of disinvestment. One is regarding the valuation of these assets. The other is the decision to hand over these companies to a "strategic partner", who will buy only 25% of the shares.

The earlier valuation of IPCL shares suggested that 25% stakes in IPCL can be sold at a share value of Rs.160. The valuation done by the Working Group on Disinvestments -- A Case Study of IPCL -- based on replacement costs showed then that it should be at least Rs.265. If we take into account that with 25% share the "partner" was to be handed over control, the share value, purely by normal commercial practice, should not have been less than Rs.500 per share.

If we see the actual figures, the magnitude of what was happening will become clear. The "strategic partner" was to pay about Rs.1,100 crores to acquire 25% share and get control over assets worth Rs.10,000 crores and cash reserves of Rs.2,780 crores! Some of the above figures may change with the decision to spin off the Baroda plant and merge it with IOC; however, the essential process – handing over IPCL at a fraction of its value as proposed earlier –still remains same.

While the declared decision of the Government in 1997 was that companies such as IPCL should be given autonomy and helped to become global players, it went about it in a strange way indeed. IPCL was left headless for long periods, with a Joint Secretary from the parent ministry officiating as CMD. No attempts were made to either understand the new competitive scenario or chalk out a new strategy. Instead, its profits were allowed to plummet: IPCL’s profits fell from a consistent high level of level of more than Rs.500 crore in 1994-95, 1995-96, 1996-97 to Rs.29 crore in 1998-99. While a part of this could be attributed to low international prices of petro-chemical products, it is difficult to escape the suspicion that IPCL was being deliberately run down to lower its market value.

Apart from the financial aspects of the deal, the other problem with this kind of disinvestment springs from the understanding of "strategic" and "non-core" industries. The Disinvestment Commission had suggested that in any industry, where there is competition, the PSUs can be put up for disinvestment. In IPCL's case, it was felt that as Reliance is another major player, therefore there was competition and the government could disinvest in IPCL. If Reliance becomes the "strategic partner", then effectively there will be no competition; in such a scenario, does the sector become "strategic"?

In the current proposal, IPCL will hike off its Baroda plant and sell it to Indian Oil Corporation (IOC). It will help in bringing down the amount that Reliance – if it becomes successful -- will have to shell out for the rest of IPCL. It will also help the Government mop up IOC’s current surplus for meeting its burgeoning budget deficit while shorn of its surplus, IOC will be prevented from bidding for IPCL’s Nagarthone and Gandhar plants.

It of interest to know the source of funds that Reliance will use for an IPCL buy out. Reliance currently owes more than Rs.2,000 crore to the public sector banks and its overall borrowings, largely to the public sector financial institutions, is to the tune of Rs. 10,000 crore. It is good public money then that will be used by Reliance to “buy” IPCL. To help this process, the Government is willing to give up control to the strategic partner even if it buys only 25% of the shares. As the Maruti case has shown, once a partner secures control, the Government’s share has little value: it can only be sold to the “strategic” partner who then dictates its terms.

The other disinvestments proposed are not significantly different. All of them have near same modalities: handing over profitable PSUs to private partners at throw away prices and creation of private monopolies. The Government is liquidating the country’s prime assets built up over the last 50 years with peoples’ money.

The original vision of allowing the navaratnas to become autonomous and global players is being given an official burial. Instead of building on the high technological skills that exist in the public sector, the real agenda is dismantling and handing it over at throwaway prices to global and domestic capital.


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