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Maha merger – a beginning

Finance Minister Arun Jaitley announced in his budget speech the integration across value chain of Central public sector enterprises. NITI Aayog outlined a plan for the formation of a giant integrated PSU oil company. The budget also announced raising Rs 72,500 crore through disinvestment. 

Jaitley and his government had been pre-occupied with the GST issue and got it ready for implementation from 1 July. That task over, the government seems to focus on other major pronouncements in the budget. 

The cabinet has thus taken up the mega oil corp issue. The immediate plan is to merge the two large oil corporations, ONGC and HPCL. 

Indira Gandhi’s spate of nationalisation...

Indira Gandhi, in her anxiety to strengthen her hold on the party and government,overpowering the strong syndicate of senior Congress leaders, embarked on a spate of nationalisation: starting with 14 major banks in 1969, this extended in quick time to the nationalisation of 108 sick textile mills, the coal, general insurance and petroleum companies in the 1970s. The two flourishing western oil companies, Esso and Caltex, were merged to form the Hindustan Petroleum Corporation; Burma Shell was nationalised, rechristened as the Bharat Petroleum Corporation Ltd. 

The present plan is to allow ONGC engaged in oil exploration, production and refining, to acquire 51.1 per cent government’s stake in HPCL at a cost of around Rs 28,000 crore. 

HPCL has refineries at Mumbai and Visakhapatnam with a total capacity of around 15 million tonnes (27.5 including its subsidiary). ONGC, initially promoted the Mangalore Refineries and Petrochemicals along with the Aditya Birla group. Later the Birlas withdrew and ONGC holds 71.6 per cent and HPCL 16.9 per cent of MRPL that has refining capacity of 15 million tonnes. Thus, after merger the total capacity will double.

When the earlier NDA government planned to open up petroleum product retailing, ONGC, Reliance, Essar and Shell obtained licences and opened up retail outlets. When the earlier plan to lift administrative control from 2002 was given up, ONGC dropped the plan. Now with the merger, ONGC’s operations will range from oil exploration to production, refining and marketing. HPCL has over 14,000 retail outlets accounting for nearly a fourth of the total. 

The government will get around Rs 38,000 crore through disinvestment. Of course, this is P Chidambaram’s sophistry, of one public sector unit or finance company acquiring government stake in another to show income through disinvestment.

Just the beginning...

One may expect this measure as just the beginning of the formation of the mega PSU oil company. The largest PSU, Indian Oil, may take over Oil India, the other oil exploration and producing company and possibly enlarge this by the acquisition of BPCL. The next stage may be for these two merged entities to join hands and form the maha oil company. But finding the cash resources for this as also to integrate the work cultures and systems of these large corporations will take time. 

HPCL and BPCL had the advantage of mature, well-established systems and practices of the western oil majors. The purely Indian companies, ONGC and Indian Oil, were not a match to these for long. The bitter experience of the merger of Air India and Indian Airlines has its vital lessons. Salary structures and HR policies of these two corporations were different and proved difficult to synthesise even years after the merger. 

The merger of ONGC and HPCL, followed by other PSU oil companies, would help the government meet the disinvestment target. One may expect the much talked about consolidation of the banking sector to follow.     -SV        

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