Why It’s Important To Monetise BPCL’s Investments Before Privatising It
The privatisation process of Bharat Petroleum Corporation Limited (BPCL) has gathered steam. News reports indicate that the expression of interest (EoI) documents will be out in a few days.
Reports also indicate that there is a fair bit of interest from oil and gas majors like Rosneft from Russia, Saudi Aramco, Abu Dhabi National Oil Company and Shell among others.
While the transaction will be completed only in the third quarter of the financial year 2020-21, the government needs to carefully handle the investments that Bharat Petroleum has made in other companies. The market value of these investments is over Rs 13,000 crore out of a market capitalisation of Rs 100,000 crore for the entire company.
BPCL has significant investments in Petronet LNG (12.5 per cent stake), Indraprastha Gas (22.5 per cent stake), Oil India Limited (2.67 crore shares), and a stake in unlisted companies like FINO PayTech and Cochin International Airport.
This is apart from its 61.5 per cent stake in Numaligarh Oil Refinery and treasury shares worth 9 per cent of the equity.
The government has decided to transfer Numaligarh refinery to other oil public sector undertakings like Oil India which holds 26 per cent in the company (with Assam government holding the balance).
This is to ensure that it is compliant with Assam Accord signed in 1985 which envisaged a public sector refinery. Similarly, the government has announced that the treasury shares will be cancelled and has initiated steps to ensure this.
The stakes in Oil India Limited worth approximately Rs 270 crore can be sold in the markets.
Similarly, the shares in FINO PayTech (a private unlisted company) can be sold to PE funds in a private transaction.
Shares of Cochin International Airport (worth approximately Rs 115 crore as per last audited financials of BPCL) can be sold to other existing partners of Cochin International Airport.
That leaves us with the stakes in Petronet LNG and Indraprastha Gas, where the stakes are valued at over Rs 12,800 crore (Rs 5,000 crore for 12.5 per cent stake in Petronet LNG and Rs 7,800 crore for 22.5 per cent stake in Indraprastha Gas Limited). The government has a few options here:
A. Sell the stakes to other public sector companies like Oil and Natural Gas Corporation (ONGC), Indian Oil, etc. While this would solve the issue of “public sector character” of these companies, it would hurt ONGC and Indian Oil unless there is a strong case made out for a strategic fit. In the absence of a strong strategic link, it would be a financial investment which would pull down the returns of the PSUs and thereby their valuations.
B. Sell the stakes in the market by inviting bids from portfolio investors like mutual funds, insurance companies and foreign institutional investors.
C. The third option would be to distribute the shares of Petronet LNG and IGL to existing investors of BPCL. Back of the envelope calculations indicate that for every 100 shares of BPCL, existing investors will get 9.5 shares of Petronet LNG and 8 shares of IGL. This will enable the government of India to have a minority stake in both these companies and monetise them later. However, this process is time-consuming with approvals needed from shareholders, Securities and Exchange Board of India (SEBI) and National Company Law Tribunal (NCLT) and could impact the privatisation deadline.
In both cases listed above (A and B) the realisations, along with realisations from sale of shares in Numaligarh Refinery, Oil India, Cochin International Airport and FINO PayTech should be distributed as dividend before the company is privatised.
This will prevent any allegations of a sell-out. If this step is not taken, a potential buyer could pay Rs 53,000 crore for the government’s stake in BPCL and within a short period recoup Rs 13,000 crore by selling the investments.
Note: The VSNL privatisation is a precedent. The government had demerged the surplus land of 774 acres before selling the stake in VSNL to Tatas in 2003.