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Privatization of The Oil Sector

Written by: Rajat Sharma
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"I am not an advocate for frequent changes in laws and constitutions, but laws and constitutions must go hand in hand with the progress of the human mind. As that becomes more developed, more enlightened, as new discoveries are made, new truths discovered and manners and opinions change, with the change of circumstances, institutions must advance also to keep pace with the times. We might as well require a man to wear still the coat which fitted him when a boy as civilized society to remain ever under the regimen of their barbarous ancestors." - Thomas Jefferson,

With each passing day economies are becoming much more complex and competitive. To progress in such times, indeed newer techniques have to be evolved, however one should be mindful of the old adage which says that, "the art of progress is to preserve order amid change and to preserve change amid order".
Over the years the public sector has played a central role in enabling our country to accomplish the national objective of self-reliance. It is therefore natural to feel uncanny about the idea of disinvestment, specifically, when the issue is one of disinvesting a fortune 500 company. Supporters of the idea claim that to survive in an ever-changing economic environment, and for the economic progress of the nation, disinvestment is the key. It is therefore suggested that Industries which have become a liability for the government or in other words, which have not been running as well as they potentially should, may be disinvested.

Scenario Prior To 1990's
As India got Independence in 1947, a need was felt to build a strong nation, with a government that was attentive to the needs of its people, which would work for their betterment and prosperity. It was hoped that a strong government would own undertakings that would create employment, and work towards the eradication of poverty amongst other problems. The decades between independence and the 90' witnessed enormous industrialisation, where the government set up companies, and built a strong infrastructure.

Post 1990's
By the advent of the 1990's, the Government had stretched its hands in almost every sector, be it iron and steel, agriculture, telecommunications, and automobiles, while many of these government undertakings were doing well in their respective areas, few others were not getting the desired results. The notion of disinvestment was first brought up in the year 1991, when the government, outlined the objectives of disinvestment as follows:
It would broad base the equity
Improve management
Enhance the availability of resources for these enterprises
Generate income for the exchequer

While initially, the idea was to disinvest not more than 20% of the government equity in selected public sector undertakings, a major transformation happened in 1996. The broad aspects of the policy of disinvestment as laid down at this time were:
To classify the public sector non-core strategic areas for the purpose of disinvestment;
To set up a Disinvestment Commission to deal with disinvestment related matters;
To take and implement decisions to disinvest in a transparent manner;
To assure the workers and employees of job security or, in the alternative, opportunities for retraining and redeployment.

The next important step was taken in 1999 when the government classified, public sector into strategic and non-strategic areas. Following were included in the list of Strategic Public Sector Enterprises:
Arms and ammunitions and the allied items of defence equipment, defence air-crafts and warships;
Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries);
Railway transport.
All other Public Sector Enterprises were to be considered non-strategic. While initially the government proposed disinvestment of up to 26%-50% stake, over the years the policy of the government has undergone a huge change. At the present day the government is considering the idea of giving up its entire stake in the non-strategic areas where the establishments are running in losses.

Disinvestment Commission
The Disinvestment Commission set up in 1996 is now the main body governing matters related to disinvestment. The functions of the disinvestment commission include:
Facilitating the withdrawal of the public sector from non-core strategic areas
To assure the workers and employees of job security,
Ensuring opportunities for retraining and redeployment.
Ensuring that any decision to disinvest was to be taken and implemented in a transparent manner.

On the recommendations of the Disinvestment commission, the Government has disinvested a substantial part of its equity in enterprises such as ITDC, IPCL, VSNL, CMC, BALCO, Hindustan Zinc, and Maruti Udyog. The procedure followed in disinvesting the various government undertakings has been different in different cases, for instance, while BALCO was a strategic sale; Maruti was disinvested by a public offer. However most of these units could be termed as sick, incapable of being revived or under-productive and therefore the issue of disinvestment was not considered to be controversial.

Issues involved in the HPCL/BPCL disinvestment

The major controversy surrounding the HPCL, BPCL disinvestment is that, not only are these units running profitably but also that they belong to the oil sector, a sector of strategic importance to the nation.

The government had taken the advice of the Advocate General, who believed that the disinvestment of government equity in the two entities did not require parliamentary sanction. The government then proceeded to disinvest the two companies. However this decision to sell the oil majors was challenged and Writ petitions were filed in public interest directly before the Supreme Court under Article 32 of the Constitution of India. [AIR 2003 SC250]

Following the arguments of the petitioners- The Oil Sector Officer's Association and the Centre for Public Interest Litigation, and the respondents, the Supreme Court, Speaking through, justice S. Rajendra Babu, and Mr: Justice G.P. Mathur, on 16th September 2003, ruled that the Centre will have to take prior approval from the Parliament for selling stakes in the two PSU oil majors - Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL).

The main contentions put forward by the petitioners, were;
1. The decision to sell majority of the shares in HPCL and BPCL to private parties without parliamentary approval, is contrary to and violative of the provisions of the ESSO (Acquisition of undertaking in India) Act, 1974, the Burma Shell (Acquisition of undertaking in India) Act, 1976, and Caltex (Acquisition of shares of Caltex Oil Refining India Ltd. And all the undertakings in India for Caltex India Limited) Act, 1977.

2. Whether the executive can by its orders reverse the two enactments of the parliament nationalizing the oil sector companies?

Earlier decision in the Balco case [AIR 2002 SC 1950]
The primary issue involved in the BALCO case was regarding, the validity of the decision of the government of India to disinvest and transfer 51% shares of m/s Bharat Aluminium Company Ltd. {hereinafter referred to as Balco} The question that arose for consideration in that case was, whether such a decision to disinvest is amenable to judicial review?
The petition was dismissed and the Supreme Court held that, "the process of disinvestment is a policy decision involving complex economic factors. The courts have consistently refrained from interfering with economic decisions as it has been recognized that economic expediencies lack adjudicative disposition and, unless the economic decision, based on economic expediencies is demonstrated to be so violative of constitutional or legal limits on power or so abhorrent to reason, that the courts would decline to interfere". (It is important to note here that Balco was not created by any act of parliament) The Supreme Court held that in such a case the appropriate forum for testing policy is parliament and not the court.

Rationale for disinvestment
As far as the legal perspective, it can be argued that, while BALCO was not created by an act of parliament, and hence was dissolved without any parliamentary mandate, Maruti Udyog Limited on the other hand was acquired by a parliamentary mandate; however it was disinvested without any amendment of the same. But again Maruti Udyog can in no way be considered as a strategically important company to the nation, while oil being probably the biggest imported items and the largest spender of the foreign reserves, is a sector of vital national importance and should not be disinvested. The recommendation committee has umpteen number of times urged the government to formally declare oil as belonging to the strategic sector, and that oil companies be removed from the list of companies proposed to be disinvestment. Under the circumstances the present judgment leaves many ambiguities. The main uncertainty is whether it will be easier to close down a loss-making PSU than to make attempts to revive it through disinvestment.

Another point in support of the proposed disinvestment can be found in the basic jurisprudential theory of ownership as propounded by Salmond, akin as it were to ones basic understanding of the concept itself, "an owner has a right to use or dispose of his property as and how he desires. Although the parliament created the Two PSU's however the ownership vests with the government. Also, while formulating the parliamentary enactments, which created the two oil majors, the parliament had made no boundaries that the government may not cross. Nothing whatsoever was said about the issue of disinvestment. Again this was succeeded by the enactments which nationalized the banks, which in turn clearly laid down for a 51% government holding in the company and that any disinvestment below this percentage will require parliamentary mandate.

Position against disinvestment
The petitioners argued that the BALCO judgment of the Supreme Court allowing disinvestment of the PSU did not apply to HPCL and BPCL, as the aluminum company was not set up by an act of parliament, argued it. The court accepted the main contention of the petitioners that the two oil companies cannot be privatized through an executive order, overriding a Parliamentary legislation creating HPCL and BPCL in 1974 after acquiring the assets of the previous ESSO and Burmah Shell.

On a different footing, another thing that comes to mind is, whether the disinvestment policy being followed by the government has shortcomings. On the advice of the Advocate General, it was decided to disinvest government shares in the 2 oil companies. The Supreme Court verdict, making it mandatory to get a parliamentary approval had come at a time when Reliance group had already made its intentions of purchasing HPCL shares more than clear. The due-diligence was on track and completed by reliance to acquire HPCL. For any private company, not owned by the government this would have been reason enough to hold the government responsible to get its accounts in the open. Considering the fact that Reliance and HPCL are competitors in the oil industry, the government move does not appear to be very wise.

Conclusion
It is true that oil is one of the biggest consumer markets, going by the past experiences, it can safely be said that, privatization in this sector would make the consumer happy. One view is that the oil industry is far too important for the economic development of the nation; it may not be correct to leave its control in the hands of private companies. As far as the long term impact of the judgment on the disinvestment policy of the government is concerned, the apex court has answered this question in the judgment itself by stating that the judgment has no bearing on the disinvestment process, but is limited only to the context of the two oil PSU's.

At the same time it may be said that the issue is almost certain to crop up again sooner or later and will pose similar or even more challenging problems especially in a country wedded to democracy but until then this situation will exist. I may conclude by quoting the famous words spoken by, Marilyn Ferguson: It's not so much that we're afraid of change or so in love with the old ways, but it's that place in between that we fear . . .. It's like being between trapezes. It's Linus when his blanket is in the dryer. There's nothing to hold on to.

The author can be reached at: rajat@legalserviceindia.com / Print This Article

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