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Paranjoy Guha Thakurta

Why did Reliance bid so high for IPCL?

The Ambanis will now control at two-thirds of the Indian petrochemicals market, spawning a near-monopoly. But should this have been allowed?' asks Paranjoy Guha Thakurta.

There was more than a touch of irony when Union Minister for Divestment Arun Shourie told journalists on May 18 that the government of India had decided to offload 26 per cent of its share of the equity capital of the public sector Indian Petrochemicals Corporation Limited to the Ambani-family controlled Reliance group.

That it was Mr Shourie who made this momentous announcement about the country's largest exercise in divestment till date would surely have seemed somewhat strange to those with slightly long memories, that is, those who could recall what the former journalist-turned-minister had become rather well known for during the mid-1980s.

In his earlier avatar as the editor of the Indian Express chain of newspapers, right through the second half of 1986 and 1987, Mr Shourie had authored a series of path-breaking articles lambasting the Reliance group and exposing the manner in which successive Congress governments in New Delhi had bent over backwards to favour the Ambanis.

Many of these articles had been co-authored by S Gurumurthy, the diminutive Chennai-based chartered accountant and leading light of the Swadeshi Jagaran Manch.

One is not aware of Mr Gurumurthy's reactions to Mr Shourie's latest "achievement", nor those of the SJM that owes allegiance to the Rashtriya Swayamsevak Sangh, the ideological parent of the ruling Bharatiya Janata Party. But another ideological affiliate of the RSS, namely, the trade union body, the Bharatiya Mazdoor Sangh, is currently hopping mad at Mr Shourie's decision to hand over managerial control of IPCL to the Reliance group.

But before elaborating on the contradictions within the Sangh Parivar and within the BJP-led National Democratic Alliance government, a few facts about the Indian government's largest divestment exercise require repetition.

The Reliance group had been eyeing IPCL, one of the government "navratnas" (or nine jewels) in the public sector for at least four years. Why? The reason is disarmingly simple. By being at the helm of affairs at IPCL, the Ambanis would now be able to control at least two-thirds of the total Indian market for all kinds of petrochemical products.

More significantly, the new conglomerate would be able to control as much as 70-90 per cent of the market for specific products with complex funny-sounding names, for example, paraxylene, polypropylene, mono-ethyl glycol, poly-butadene rubber, poly-vinyl chloride, di-methyl terphthalate, low and high density polypropylene (LDPE and HDPE) and so on.

Before RIL was successful in controlling IPCL by outbidding its rivals, the public sector Indian Oil Corporation and the Nirma group, there had been hectic lobbying in the topmost echelons of the government.

There were newspaper reports of the Union Cabinet being split down the middle on the issue of handing over managerial control of IPCL to Reliance and it was even reported that Prime Minister Atal Bihari Vajpayee had to personally intervene to break a deadlock and support of Mr Shourie's position.

There had also been reports of senior officials in the Prime Minister's Office lobbying in favour of the Ambanis.

The Reliance group bagged the 26 per cent stake in IPCL for Rs 1,491 crore (Rs 14.91 billion) by bidding Rs 231 per share against Rs 128 bid by IOC, Rs 110 by Nirma and an official "reserve" price of Rs 131.

The group would have to shell out an additional Rs 1,147 crore (Rs 11.47 billion) to acquire an additional 20 per cent of IPCL's shares through an "open offer" to the public at the same price of Rs 231 per share since this is a statutory requirement of the market regulator, the Securities and Exchange Board of India.

Why did the group bid so high, especially since the market price of the IPCL scrip had stood at Rs 92 on 17 April and had thereafter gone up to Rs 133 on 15 May. Having lost out earlier in its bids to acquire stakes in IBP (formerly Indo-Burma Petroleum) and Videsh Sanchar Nigam Limited to IOC and the Tata group, respectively, the Reliance group made no mistakes this time.

The Ambanis made sure their bid for IPCL was unassailable and for this, the Reliance group was willing to fork out a hefty premium - so that the group could completely dominate the Indian market for petrochemicals.

The country's market for petrochemicals is currently growing at roughly 15 per cent per year against an international growth rate of 5 per cent. India is expected to soon become the third largest market for petrochemicals in the world after China and the US.

In the process, the Reliance group hopes it would be catapulted into the big league of petrochem producers like Dow Chemicals, Borealis, BP Amoco and Basell.

The Ambanis clearly intend leveraging their clout in the Indian market so that the group's investment in excess of Rs 2,500 crore (Rs 25 billion) is recovered in two to three years. Most greenfield investments in petrochemicals take anywhere between five and ten years to recover its costs.

The Reliance group would be able to save large sums on account of greater flexibility in use of feedstock (naphtha and natural gas) over five manufacturing units: its two existing ones at Patalganga and Hazira and the three IPCL facilities at Vadodara, Nagothane and Dahej.

The group would be able to improve its logistics in marketing and distributing products and be able to better coordinate capacity utilisation.

Above all, the control of IPCL would enable the Reliance group to enter the market for certain high-value products and it would be able to effect substantial savings in the use of catalysts, one of the most expensive ingredients used in the production of petrochemicals.

The Reliance-IPCL conglomerate would create formidable entry barrier to potential new entrants. If, on the other hand, IOC had acquired the 26 per cent stake in IPCL, it would have been the second largest player and thereby offered stiff competition to Reliance that, in turn, would have benefited consumers.

The big question is why IOC bid so low for IPCL shares. Did the public sector petroleum behemoth seriously contemplate tying up with the Oil & Natural Gas Corporation to put in a joint bid for IPCL?

Why did a contest that was expected to have a photo-finish end up with the Reliance group yards ahead in the race? These questions might be academic at present, but they are nevertheless relevant.

As India's largest petroleum company, the government-owned IOC had lodged a strong protest when it was disallowed by the government from bidding for the shares of its smaller sisters, Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited.

The former IOC chairman M A Pathan had argued that it would be clearly discriminatory on the part of the government if Reliance was allowed to bid for IPCL while denying IOC the opportunity to bid for HPCL and BPCL.

A monopoly is supposed to be bad, irrespective of whether it is in the private sector or the public sector. As a matter of fact, many economists would argue that if a monopoly has to exist, it is better that it be controlled by the government (or the representatives of the people) than by private entrepreneurs who would think of their own profits before considering what may be desirable for the public at large.

Clearly, such logic did not cut much ice with Mr Vajpayee, Mr Shourie and, of course, the Ambanis. The journalist-turned-divestment minister claimed that a monopoly is not necessarily such a bad thing provided market dominance is not abused.

Further, he claimed that free imports would also ensure that domestic manufacturers remained "honest" and did not fleece consumers.

Mr Shourie has been trained as an economist and he used to be employed by the World Bank. Surely he knows better than most others that life is not so simple.

First, the Union government is yet to dismantle the moribund and ineffective Monopolies and Restrictive Trade Practices Act and replace it with a new competition law. No one knows for sure when the proposed new competition law would be enacted.

Secondly, the effective level of protection the government has provided to imports of petrochemicals varies between 30 per cent and 50 per cent.

Given the clout wielded by the Ambanis in the corridors of power in New Delhi, it does not seem likely that these levels would be substantially reduced in a hurry.

In other words, the Ambanis can hope to laugh all the way to the bank and back for quite some time to come.

IOC can at this juncture acquire a stake in Haldia Petrochemicals Limited in eastern India - even it this takes place, Haldia Petrochemicals could at best prove to be a weak competitor to the Reliance-IPCL giant. It is obvious to most experts on the petrochemicals industry that IPCL could prove to be a veritable gold mine for the Reliance group.

IPCL's free reserves are currently in the region of Rs 2,700 crore (Rs 27 billion) [more than what the Reliance group would be shelling out] and the replacment cost of its existing assets would exceed Rs 10,000 crore (Rs 100 billion).

It would be instructive to recall what had been written about IPCL by the divestment commission when it was headed by G V Ramakrishna.

The commission had categorically observed that "care should be taken while pre-qualifying bidders to ensure that the strategic sale does not lead to market dominance".

It was also pointed out that since its inception, IPCL had earned a historical rate of return of 18 per cent per annum on its net worth and capital employed. As had been pointed out more than a year ago by the working group on divestment issues - comprising Left-wing economists and technocrats - the Union government would have been better off borrowing money at a rate of interest of 12 per cent per year than selling its equity in IPCL.

All these arguments clearly cut no ice with the Vajpayee government which is repeatedly accused of non-governance by its political opponents and is hence keen on pressing full steam ahead on the divestment front.

Keshavbhai Thakkar, president of the IPCL Employees' Association, which is affiliated to the BMS (the trade union body that owes its allegiance to the RSS) has pointed out that it is inexplicable why the government did not appoint a proper chief executive of IPCL for almost two years.

The last full-fledged chairman and managing director of IPCL, K G Ramanathan, had left his job and the Indian Administrative Service to join the Reliance group (where else?) together with a number of key executives. It is now said that he would once again be at the helm of affairs at IPCL under the new dispensation.

Mr Thakkar has more grievances. He has wondered why the reserve price of Rs 131 per share was not calculated in a "transparent" manner.

He is even more unhappy about the fact that the employees' association was "deliberately" kept out of the bidding process though it was willing to fulfil all pre-qualification requirements and had even made tentative financial arrangements with particular non-resident Indians.

Perhaps, the bosses of the RSS in New Delhi's Jhandewalan could check out with Mr Shourie why he chose to ignore the claims of the BMS. And time will surely tell whether the decision to allow the Reliance group to acquire control over IPCL was in the interests of the nation.

Date posted: September 17, 2014Last modified: September 17, 2014Posted byParanjoy Guha Thakurta