Stake Sale. The well-oiled wheels of BPCL’s privatisation process

Life will soon come full circle for Bharat Petroleum Corporation Ltd. What started off as Burmah Shell, with foreign ownership (a joint venture of Royal Dutch, Shell and Rothschild), before it was acquired by the Indian government, will soon go back to being a private player. However, whether it will have an Indian owner or foreign, remains to be seen.

Almost 16 months from the day — November 20, 2019, to be precise — the strategic disinvestment of BPCL got the nod, the privatisation process is moving into the next phase. By September, the sale of BPCL is expected to be completed.

On March 25, at an extraordinary general meeting of BPCL, shareholders approved the disinvestment of the company’s entire holding in its subsidiary Numaligarh Refinery Ltd (NRL).

New approaches

With some unique approaches, the BPCL disinvestment process could hold lessons for future exercises.

For starters, the divestment has two parts. The first is the strategic disinvestment of the government’s shareholding of 53.29 per cent in BPCL (except its equity shareholding of 61.65 per cent in NRL) along with transfer of management to a strategic buyer.

The second is the disinvestment of BPCL’s shareholding in NRL along with transfer of management control to a central public sector enterprise (CPSE) operating in the oil and gas sector. The BPCL board has agreed to sell its stake in NRL to a consortium of Oil India and Engineers India and to the Government of Assam.

The NRL sale is estimated to fetch ₹9,876 crore and, after tax deduction, could net around ₹9,000 crore. According to government sources, the proceeds from NRL stake sale could be used to buy the remaining 36.62 per cent share of OQ (formerly known as Oman Oil Company) in Bharat Oman Refineries Ltd (BORL) at Bina, Madhya Pradesh, and for another dividend payout.

Earlier, after stake sale in NRL, the company announced interim dividend of ₹5 per equity share of face value ₹10 for the financial year 2020-21.

Much below expectation, it was the second interim dividend for FY21. The first interim dividend was announced in February, of ₹16 per equity share of face value ₹10. As the Central government is the largest shareholder (around 53 per cent), it stands to gain a lot from the dividends. The OQ acquisition is estimated to cost around ₹2,400 crore and will be completed by March 31. This will give BPCL 100 per cent holding in BORL, making it more attractive for the eventual buyer.

Stock option for staff

Even as BPCL is doing all it can to sweeten the deal for buyers, it is also making sure its employees stick around, by launching an ESOP scheme. The company plans to offer over 4.33 crore shares to employees who have completed five years of service. Each eligible employee will get a maximum of 9,000 shares. The government is hopeful that the stock option would nip in the bud any protests against privatisation.

Indeed, those who have contested the disinvestment will be deemed ineligible for ESOPs.

Of BPCL’s 10,500-odd employees, 5,500 are workmen, whose wage and benefits are decided through negotiations between the management and the unions, based on collective bargaining under the Department of Public Enterprise (DPE) Guidelines and Region cum Industry principles.

The valuation

According to officials, the restructuring exercise was important before going in for the privatisation. The company says it has already received multiple expressions of interest (EoIs) from private parties. Now, financial bids will be invited from qualified parties and a final bidder will be selected.

“Normally there are two methods for financial bidding — one on the basis of a floor price/reserve price which is known to all and another when the reserve price is not known to anyone,” an official said, adding that the second option has been exercised in the case of BPCL.

The official was hopeful that the privatisation will be completed by the July-September quarter of FY 2021-22. A critical issue is valuation. Is the government undermining the valuation by hiving off subsidiaries, or making it more attractive by streamlining the structure?

In an earlier interview to BusinessLine , Tuhin K Pandey, Secretary, Department of Investment and Public Asset Management (DIPAM), had addressed this question. “How do you sell it? Basically you identify what are the entry barriers, and that is what we did. BPCL is a large company. In general financial capacity, to close the deals we put an entry barrier of $10 billion. If you qualify, then you come as a bidder and you do the due diligence, after which you make a financial bid,” Pandey said.

Parallelly the government has engaged its own financial partner to fix the reserve value after the financial bidding takes place. When the bids are opened, the government will decide the winner based on who matches the reserve value, he explained.

The million-dollar question on everyone’s lips is how much BPCL’s sale will fetch? The government targets ₹1.75 lakh crore through disinvestment during FY 2021-22, with ₹1 lakh crore expected from BPCL alone.

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Lots of figures are being bandied about, but officials remain tightlipped. “We deliberately do not fix our reserve valuation till the financial bids are locked in... if there is leakage of the price, it will be compromised,” Pandey said.

The valuation will hinge not just on the stock performance, which fluctuates daily based on certain news, and the volume weighted average price (VWAP) of the stock, but also on something called control premium, because the winning bidder will control the company. Currently, BPCL is trading at ₹424.25. Crude oil prices will also have a bearing on the valuation. Oil prices tumbled last week.

The government is keeping close to its chest the names of the bidders — though none of the giants, whether Aramco or Reliance among others, seem to be in the fray. Anil Agarwal’s Vedanta, however, has announced it is a bidder.

Unanswered questions

Once the company is sold, will BPCL continue to get the advantage of the subsidy mechanism it enjoys today as a public sector undertaking? The government said that would be decided at the time of the finalisation of the sale.

The wait is also over whether BPCL can lure international oil majors to India’s refining and marketing business.

One thing is for sure, though — the BPCL disinvestment effort will be a testing ground for the government, as there are more sales in the pipeline.

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