A cash-strapped Centre is pressing ahead with its stake-sale plan in five PSUs, but it is moot if minority shareholders of oil marketing company Bharat Petroleum Corporation Limited (BPCL) will partake of the expected big gains.

The answer, to a large extent, will depend on who the Centre sells its 53.29 per cent stake in BPCL to — to a private player (domestic, such as Reliance Industries, or foreign, such as ExxonMobil/Saudi Aramco/ADNOC), to another PSU, or to a hydrocarbon major such as Indian Oil. If it is the latter, minority shareholders might get the short shrift, as happened last year when the Centre executed an inter-PSU transaction and sold its 51.11 per cent stake in HPCL to ONGC.

Open offer?

At that time, the Centre cut itself a neat deal and pocketed a 14 per cent premium to the HPCL stock’s prevailing market price. In the normal course, ONGC would have had to make an open offer to acquire an additional 26 per cent stake from minority shareholders at the same price. But ONGC was exempted from this obligation, depriving minority shareholders the benefit of the premium over the stock price.

The Centre did this by including phrases that helped avoid an open offer. Prior to the deal, the Department of Investment and Public Asset Management amended the terms to state that “HPCL will continue to be a government company in terms of Section 2(45) of the Companies Act, 2013 and will continue to be controlled by the Government of India through ONGC under the administrative control of the Ministry of Petroleum and Natural Gas”. So, with effectively no transfer of actual control from the Centre, there was no requirement for an open offer by ONGC. The Centre likely did this to shield ONGC’s already stretched balance-sheet.

The script may be repeated in the BPCL stake-sale, too, if the buyer is a PSU.

Control premium

Also, a stake sale in BPCL to a PSU will likely mean a lower valuation. That’s because the Centre should be able to command a higher controlling premium for BPCL from private players than from a PSU.

BPCL is a strong, profitable company accounting for about 15 per cent of the refining capacity and about a quarter of the fuel retail outlets in India. The company also has a presence in the upstream business with stakes in gas fields in Brazil and Mozambique. Besides, it holds stakes in high-potential gas utility companies such as Petronet and Indraprastha Gas. In short, an attractive buy for a private player seeking a major presence in the attractive Indian hydrocarbons market.

If the Centre aims to maximise its revenue from the BPCL stake sale, privatising it would seem the logical choice, especially given the increased pressure on the fiscal deficit postthe recent corporate tax cut, slowing GDP growth and lower-than-expected GST collections. In this context, achieving the ambitious disinvestment target of ₹1.05-lakh crore in FY20 will be crucial for the Centre, and that will depend to a large extent on rich proceeds from the BPCL stake sale.

The BPCL stock has run up sharply in recent weeks on the stake-sale buzz, and at the current price of ₹488 a share, can yield the Centre about ₹56,000 crore. Some analysts expect a greater upside in the case of a privatisation. For instance, a recent report by Sbicap Securities says that if privatised, the potential valuation of BPCL could rise to over ₹700 a share.

Likely constraints

But privatisation may be easier said than done. One, there is strong resistance to the move from BPCL’s employees and Opposition parties. Next, the Centre is running against a tight deadline with less than six months to the fiscal year-end — privatisation at the best valuation of a complex entity such as BPCL would need more time. Also, it is to be seen whether the Centre will be ready to bite the bullet and let go fully of a Maharatna company in the politically crucial oil and gas sector, where it often intervenes, even if indirectly, to keep fuel prices under check.

A stake sale to another PSU will be a more convenient and quicker choice. But that may mean lower valuation for all shareholders, especially the minority ones.