India to Go Slow on BPCL Disinvestment Plan

The Union Budget 2022 almost clarified that the BPCL disinvestment would not happen in the fiscal year FY22. The fiscal year FY22 will be an important year as it saw 3 long standing privatizations demand completed. BPCL was supposed to be the most high-profile case of an oil company being sold by the government. It was not merely a divestment of stake but a total privatization as the entire 52.98% stake in BPCL is planned to be sold.

Fiscal year 2021-22 has seen a good bit of success for the government in the area of privatization. For instance, loss making Air India was sold to the Tatas. The inflows may not have been much but the government stops bleeding billions of dollars on Air India each year. The second was the much smaller sale of Central Electronics Ltd to Nandal Finance. Lastly, in Jan-22, Neelachal Ispat was sold entirely to Tata Steel for over Rs.12,000 crore.

While the BPCL deal has been in the works for some time now, the government has not been too happy with the bids it has received. The government originally got 3 bids of which one has already backed out. The only prominent bid for BPCL still standing is that of Vedanta. Agarwal is willing to shell out the $10-12 billion that the government is expecting, but the government would like to see more competitive bids coming in.

In that last few years, several events at the Vedanta group have made the government wary. Firstly, there was the issue of corporate governance at its parent holding company. Then it made a bid to delist Vedanta India too low till LIC refused to buy the offer. Finally, the latest attempt is to merge its debt ridden parent Vedanta Resources with the cash rich Indian company. These events have made the government wary of selling to Vedanta.

Then there is the issue of valuation. The market cap of BPCL is around Rs.83,000 crore so 52.98% stake of the government would be worth Rs.44,000 crore. However, the government is expecting around Rs.70,000-Rs.80,000 crore for the stake, including the control premium. While the premium is justified, there are not too many takers for BPCL at that price, other than Vedanta.

The final issue is whether the government can get a better price still. One way is to retain 26% stake and get a much better valuation for that stake post privatization. That will also satisfy the employees and the creditors for the time being. It looks like the government may gain more by going slow on the BPCL divestment. That is exactly what looks likely to happen. That possibly explains the tepid divestment target pencilled for FY23.