Investors welcome India’s decision to allow privatisation of refineries

Jan 27, 2003 01:00 AM

Investors welcomed the Indian Cabinet's decision to allow the sale of the country's second-biggest oil refiner, ending a four-month political wrangle that had deterred foreign investment.
The government said that it would sell 34 % of Hindustan Petroleum to a single investor and 5 % to the refiner's staff. It will sell 35.2 % of Bharat Petroleum, the third-biggest refiner, in a public share sale in India and overseas.

The decision will help Royal Dutch/Shell Group, Reliance Industries of India and other oil companies to set up a retail network in Asia's third-biggest fuel market. The two companies are keen to buy Hindustan Petroleum because its 4,500 gasoline stations make it the quickest path to India's 2 mm bpd fuel market.
"A strategic investor will be of global size and that means better management, more opportunities and maybe better technology for the future" for the refiner, said Umesh Kamath, a fund manager at Canbank Investment Management Services.
The sale would free the refiners to sell cooking gas and kerosene at world prices. They have been forced to sell those products at below market prices since April 1, 2002, to cushion the impact on consumers of rising oil prices. That has led to losses of as much as $ 1.5 bn at the country's state-run refiners.

The government owns a 51 % stake of Hindustan Petroleum and 66 % of Bharat Petroleum. Hindustan Petroleum shares have risen 77 % in the past 12 months on expectations the buyer will pay a premium to gain management control. Bharat Petroleum shares fell amid disappointment that the government decided not to sell it to a rival.
Investors see the sales as a litmus test of India's resolve to sell other state-run companies to raise $ 2.5 bn and press ahead with measures to attract overseas investment, such as freeing up the country's labour laws. "Now that they have categorically stated they're going ahead, the implementation risk has gone away," said Tridib Pathak, a fund manager at IDBI Principal Asset Management in Bombay. "It will be one more large step in the reform process."

The amount to be sold overseas will be decided by advisers to the sale, who are yet to be selected, Pradip Baijal, secretary of the Disinvestment Ministry, said. "The sales have to happen as soon as possible to get investor confidence back in the privatisation process," said Dharmesh Mehta, director at Enam Securities, a brokerage. "One has to wait for implementation."
The government has a list of bidders for Hindustan Petroleum and will be asking them to make presentations in 10 days, Baijal said. Some political parties may still try to block the share sales.
"I have learnt things proceed only to the next obstacle," Arun Shourie, the minister for asset sales, said, in response to questions on whether there were likely to be further political hurdles.

The disposal of the refiners was put on hold on Sept. 7 because of resistance from Defence Minister George Fernandes and Oil Minister Ram Naik. Fernandes said selling the oil companieswould compromise the India's security. Naik wanted both the refiners to sell new shares to the public to help Indians benefit directly from the sale.
The government's stake in Hindustan Petroleum will decline to 12 % after the sale, and its ownership of Bharat Petroleum will fall to 26 %, said Shourie.

Source: The International Herald Tribune
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