BPCL, SCI, Concor To Breathe Life Into Modi Government’s Divestment Agenda
In approving the sale of three significant public sector companies, the Narendra Modi-led government has given itself two big shots in the arm—that it remembers its promise of reducing government presence in business, and that it has a serious chance to meet the fiscal deficit target.
Finance Minister Nirmala Sitharaman, in a media briefing following a cabinet meeting on Wednesday, said the council of ministers had approved the sale of the government’s full shareholding in Bharat Petroleum Corporation Ltd. (53.29 percent) and Shipping Corporation of India Ltd. (63.75 percent), and substantial shareholding in Container Corporation of India Ltd. (30.8 percent), along with management control, to strategic buyers.
The sale of BPCL to a strategic buyer will not include its shareholding in Assam-based Numaligarh Refinery Ltd. Instead, BPCL’s 61.65 percent stake in NRL will be sold, along with transfer of management control, to a government-owned company operating in the oil and gas sector, said the government statement issued later.
As for Concor, the government will sell a 30.8 percent stake and continue to retain 24 percent shareholding in the company. “Concor is quite integrally linked with railways, explained Tuhin Kanta Pandey, secretary of DIPAM (divestment department). “We don’t have a very competitive market in this sector so we have retained a stake. But management control will be with strategic buyer.”
The government’s shareholding for sale in these three companies is worth approximately Rs 76,000 crore, as of Wednesday’s closing share prices.
- Total market cap: Rs 1.18 lakh crore
- Government stake: 53.29 percent
- Value of stake: Rs 62,960.98 crore
- Total market cap: Rs 3,183.74 crore
- Government stake: 63.75 percent
- Value of stake: Rs 2,029.6 crore
- Total market cap: Rs 35,217.21 crore
- Government stake: 30.8 percent (To retain 24 percent)
- Value of 30.8 percent stake: Rs 10,846.9 crore
A strategic sale is likely to fetch a higher price, due to factors such as control premium. Also, for assets like Concor, it’s a chance to own a large player in a sector that doesn’t face too much competition.
To be clear though, in the case of BPCL, the most valuable stake on offer, the stock price, Rs 544 per share, has already run up substantially on expectations of this announcement. “In our view, the stock’s 49 percent rally in the last 3 months has priced in the potential rerating from the stake sale,” said a November report by brokerage Nirmal Bang.
Agreed HDFC Securities, that said in a Nov. 9 report “the current valuation multiples (8.7x EV/e FY22) are already pricing in a full privatisation scenario for BPCL”.
The valuations factor in BPCL’s shareholding in NML, which now will be sold separately.
Nonetheless, if concluded in the next four months, these stake sales will go a long way in helping the government achieve its divestment target of Rs 1.05 lakh crore for this financial year. At a time when both direct tax and GST collections have been far below expectations, an aggressive divestment agenda may help the government meet its stated fiscal deficit target of 3.3 percent for the year.
To be clear, the government did not commit to a timeline to conclude the sales. It only said due established process will be followed.
Power Disinvestment: PSU To PSU
The cabinet also approved the transfer of its shareholding in two unlisted power companies to NTPC Ltd., also a public sector company. The government holds a 54.50 percent stake in NTPC with the rest held by public shareholders. This transaction is akin to those in the past, such as the sale of Hindustan Petroleum Corporation Ltd. to Oil and Natural Gas Corporation Ltd. in January 2018.
These two power companies are Tehri Hydro Development Corporation India Ltd. and North Eastern Electric Power Corporation Ltd.
The disinvesment will involve the sale of 74.23 percent in THDCIL and 100 percent in NEEPCO, alongwith management control, to NTPC.
The remaining 25 percent of THDCIL is owned by the Uttar Pradesh state government.
THDCIL has an installed capacity of 1513 MW, according to information on its website, with two hydro generating stations at Tehri HPP (1,000 MW) and Koteshwar HEP (400 MW) and two operational wind power plants in Gujarat, one at Patan (50 MW) and another at Devbhumi Dwarka (60 MW). The company also has a portfolio of 13 projects totalling 5,539 MW under development.
NEEPCO’s website states it generates close to half of the energy requirement of North East India with 7 hydro, 3 thermal and 1 solar power station with a combined installed capacity of 1457 MW. It has a 600 MW power project under development and expected to be commissioned this financial year.
The government did not state the valuation of its stakes in these two companies and hence it is not clear how much NTPC will have to pay to purchase the government’s stakes in them.
Already On The To-Sell List
So far the divestment list has been populated with moribund PSUs and some heavily indebted ones like Air India.
Earlier, the government had given ‘in-principle’ approval for strategic disinvestment of 28 public sector companies, including Pawan Hans Ltd., Bharat Earth Movers Ltd. and Cement Corporation of India Ltd. Only a few on that list are likely to find buyers any time soon.
Also on that list is the national carrier - Air India, its five subsidiaries and one joint venture. This will be second effort to sell the airline with a debt of over Rs 58,000 crore. The first failed due lack of a buyer. The process for Air India's privatisation is on in full swing, Civil Aviation Minister Hardeep Singh Puri said earlier this month, expecting it to be completed in the next few months.
It’s not clear what the sale of the airline could fetch the government in divestment receipts, if at all anything.
The cabinet on Wednesday also accorded ‘in-principle’ approval for the reduction of the government’s stake to below 51 percent in select companies “while retaining the management control on case to case basis”.
Neither the Finance Minister nor the statement mentioned which companies these would be.
Watch | DIPAM Secretary Tuhin Kanta Pandey On Rationale Behind India’s Divestment Plan
Here are the edited excerpts from the interview.
Why the decision to exclude Numaligarh in the BPC disinvestment?
The strategic disinvestment to a private buyer will take place. For Numaligarh Refinery, this carve-out has been there as the honorable finance minister explained. This will be carved out and remain with another public sector buyer. The sale will be made to another CPSE in the oil and gas sector.
Will this mean that the government will divest Numaligarh Refinery separately when it sells its stake to another CPSE?
Numaligarh is a BPCL subsidiary, the government does not have direct equity.
You’ve taken a decision to continue holding about 24 percent in Concor. What was the reason for that, why not privatise it completely?
The Concor 24 percent is less than 26 percent but the reasons for retention of the stake is on account of the fact that Concor’s operations are liked integrally linked to the railways. The way it has developed. The competitive market will take some time to come of age in the sector.
Will the strategic disinvestments be open to foreign buyers for all five companies except THDC and NEEPCO?
There is no such restriction, it will be based on the expression of interest.
Another important decision has been to lower stake in select PSUs to below 51 percent but at the same time retaining management control. What would be the way forward? Will this be decided on a case to case basis?
Each case will be examined on its own merit and will be taken to the CCEA for approval.
How hopeful are you of meeting your disinvestment target? Buy when do you see these strategic disinvestment getting approved and the sale going through?
We are doing our best. Strategic disinvestment is only one of the modes of disinvestment. We have other modes of disinvestment. We have a lot of shareholdings that we pass on to the public and we increase the float for the retail investors.