New Delhi: The privatisation of Bharat Petroleum Corp Ltd (BPCL), along with that of Air India, was supposed to be the highlight of the Modi government’s disinvestment programme last fiscal year.
While the government was successful in selling the chronically ailing flag carrier to the Tatas, BPCL got delayed and was pushed to the new financial year. The hope was it would be among the first big-ticket deals early in 2022-23.
However, a combination of factors, including a fear that oil marketing companies do not enjoy full freedom on fuel pricing and a global push towards green and renewable fuels, has led to a lack of investor interest in one of India’s biggest oil refiners and marketing companies, top government sources told ThePrint.
This has meant a lack of enough bids at a time of high volatility in the stock markets, forcing the government to go back to the drawing board for privatising BPCL and further delaying the process, the sources said.
Although no formal statement has been made on withdrawing the stake sale of BPCL, Vedanta Resources Chairman Anil Agrawal told financial news platform Moneycontrol on 22 April that the government has withdrawn the offer to sell its stake in BPCL and will come up with a new strategy.
A senior government official said “there is a case to restart the process of BPCL privatisation so that all the issues that have come up are considered and investors are invited based on that”. “There are a lot of issues that need to be resolved before the process is concluded.”
BPCL is India’s second-largest oil marketing company after Indian Oil, and with refineries in Mumbai, Kochi, and Madhya Pradesh, it has the third-largest refining capacity after Reliance and Indian Oil.
The central government’s plan was to sell its entire stake of 52.98 per cent in BPCL, which was expected to fetch an estimated Rs 45,000 crore. The government invited Expression of Interest (EoI), or initial bids, for these in March 2020. The plan was to complete the process by March 2021.
However, by November 2020, the central government had received a total of three bids.
Where does the process stand
During this year’s Budget session of Parliament, Minister of State for Finance Bhagwat Karad told the Rajya Sabha that the BPCL’s disinvestment process had reached the second stage and that it had received EoIs.
However, the process has been stuck since, and the government has yet to formally invite financial bids for the last part of the sale process.
A financial bid is a final bid that a bidder must put down for an asset. A bidding process usually involves several stages. After they initially show their interest, bidders must put in their financial bids. A group of ministers tasked with taking a final call then decides on the reserve price for the bid — the price below which bids will not qualify. Only those bids that are over the reserve price will be considered.
The most prominent bidder was Vedanta Resources. The other two were private equity firms Apollo Global and Think Gas, which is backed by I Squared Capital.
Tuhin Kanta Pandey, secretary of the Department of Investment and Public Asset Management (DIPAM), told Bloomberg in an interview after the Union Budget that the government will wait for more suitors to bid for the company.
“We need competitive bids, we can’t do it with a single bid,” Pandey said in the interview on the sale of Bharat Petroleum Corp. “In the Expressions of Interest, we have listed the people, multiple people. They must come in,” he added.
Pandey’s reference to a single bid is about Vedanta Resources since the two others did not qualify for financial bids.
Other officials in DIPAM who spoke to ThePrint on the condition of anonymity said that because of the size of the transaction it would be difficult for domestic players to buy the entire stake in the company and would need a foreign partner.
According to the strategic disinvestment plan, there has to be competitive bidding, which is unlikely under the current circumstances. The sale terms also mandate that qualified bidders for BPCL can change or bring in new partners before placing the financial bid.
The government is concerned that global oil and gas majors have stayed away from bidding for BPCL, the officials said.
Global majors such as Saudi Aramco, Abu Dhabi National Oil Co, and Exxon Mobil had shown interest at first in buying BPCL, but none of them submitted initial bids to buy the state-owned oil refiner.
Why investors are shying away from BPCL
One of the main reasons believed to be keeping investors away is that, despite deregulation, oil marketing companies — Indian Oil, Hindustan Petroleum, and Bharat Petroleum — do not enjoy complete freedom on fuel pricing.
The Manmohan Singh government deregulated petrol prices in 2010, allowing the oil marketing companies to fix the fuel price on the basis of their costs and profit. In 2015, the Narendra Modi government deregulated the prices of diesel.
In 2017, the oil companies introduced a new formula or a mechanism for ‘daily price’ revision, which was based on a 15-day rolling average of the international crude oil prices, with fluctuations in the rupee factored into the fuel cost.
However, the government has artificially kept prices unchanged before every election, through the oil companies, since then. Between November 2021 and March 2022 — just before, and during, assembly elections in five poll-bound states — fuel prices remained static despite the increase in international crude oil prices.
The other reason cited by DIPAM officials for not much interest in BPCL is the transition towards green and renewable fuels, and the gradual weaning away from fossil fuels.
“Transition towards green and renewable sources of fuel has made it difficult for many large global investors to show interest,” the aforementioned official said. “The ongoing war between Russia and Ukraine has also affected the prospects of privatisation of the oil refiner.”
Analysts that ThePrint spoke to said foreign as well as domestic companies have inbuilt policies now to move towards greener energy using biofuels rather than focus solely on fossil fuels.
BPCL’s dependence on crude oil (a kind of fossil fuel) makes the company less attractive to potential bidders.
In its March report on the BPCL disinvestment, Fitch Ratings said while there is more visibility on government steps, several steps are still pending and require clarification.
“We do not expect the government to halt the sale should it be dissatisfied with the financial bids, given its budgeted disinvestment target and strongly articulated intent, but this could prolong the process,” the report said.
Fitch believes there is a need for the government to clarify its stand on the existing subsidies given to BPCL’s customers for liquified petroleum gas and kerosene as well as the freedom on the pricing of petrol and diesel before the divestment concludes.
“The government has traditionally used oil marketing companies, including BPCL, to carry out its socio-political agenda, but private companies may be less inclined to bear such regulatory risk,” the report said.
Missing disinvestment target yet again
Earlier projections showed that a sale of 5 per cent stake in Life Insurance Corporation (LIC) could help the government meet its target for the current year. However, the offer for sale of LIC has since been reduced to 3.5 per cent, likely to fetch the government close to Rs 21,000 crore.
Last year, the government drastically cut down its target for disinvestment to Rs 78,000 crore, from Rs 1.75 lakh crore, this year’s Budget documents showed. But after LIC disinvestment was postponed to 2022-23, even that target could not be met.
According to the DIPAM website, the total receipts on account of disinvestment stood at Rs 13,561 crore on 31 March 2022.
(Edited by Uttara Ramaswamy)