Subsidy muddle hurts minority shareholders of oil PSUs

The subsidy burden has affected the valuations of state-run oil companies and consequently the interests of shareholders. The government must implement the recommendations of the Kirit Parikh Committee to completely decontrol prices of petrol and diesel immediately, as well as remove the burden from upstream companies

For the last so many years, in the name of subsidising petrol, diesel and domestic fuel like kerosene and gas for the people, the Government of India has been passing on a substantial part of the burden of oil subsidy to upstream oil companies, who have faithfully carried out the orders of their masters, by giving large discounts to downstream oil companies, thereby causing a deep dent in their profits year after year. The magnitude of the burden can be gauged from the following figures.

It can be seen from these figures that the upstream oil companies have been bearing a hefty burden of subsidy for the last several years just because the central government, which owns a majority shares in these companies, has been directing them to do so, apparently for the following reasons that have been described in the Kirit Parikh Committee report, 2010.

1. To protect poor consumers, so that they may afford kerosene for lighting which is necessary for those who do not have access to electricity.
2. To provide clean cooking fuels like LPG and kerosene at reasonable cost from the social and environmental angle.
3. To insulate the domestic economy from the volatility in petroleum prices in the world market.

Whatever is the rational for the subsidy, there is no reason to make upstream oil companies suffer in the bargain, as the sword of uncertainty already hangs over them, with the subsidy level changing with the change in international oil prices. In all fairness, the entire subsidy burden should have been met out of the budgetary resources of the government, as protecting the poor and the country's economy is primarily the responsibility of the central government and not that of the oil companies, which should be run purely on commercial lines, more so when they are part-owned by private individuals and institutions.

The three upstream companies ONGC, Oil India and Gail were fully owned by the government till 2004. The government divested a part of the equity of Gail and ONGC in February and March 2004 and in Oil India in September 2009. The shareholding pattern of these three companies as on 31 March 2011 was as under.

Since these companies are no longer fully owned by the central government, the minority share holders of these companies too have suffered on account of this subsidy burden imposed on these companies and they continue to suffer for no fault of theirs. If this subsidy burden was not forced on these upstream companies, they would have been in much better financial health, declared much higher dividends, and their valuations in the stock market would have been much higher than what they are today.

The Kirit Parikh Committee, set up to suggest a viable and sustainable system of pricing of petroleum products, submitted its report on 2 February 2010, and recommended complete decontrol of petrol and diesel, but suggested continuation of subsidy on a much reduced scale for kerosene and LPG gas, as it is consumed by the poorer section of society. Unfortunately, the Committee did not feel it necessary to exempt upstream oil companies from the burden of subsidy and it recommended mopping up a portion of the incremental revenue accruing to ONGC and OIL India from production in those blocks, which were given by the government on nomination basis, much before the New Exploration Licensing Policy (NELP) introduced in    January 1999.

The Central Government has not yet fully implemented the recommendations of the Kirit Parikh Committee, except that the pricing of petrol has been decontrolled a few months back. All other recommendations are still to be implemented, which means that there is no respite for the oil companies, who continue to suffer from the uncertainty of the subsidy burden, as the international price of oil continues to be volatile for the last several months.

It is generally perceived that the government is reluctant to completely abolish the oil subsidy, more due to political than economic considerations. Whatever be the reasons, there is no justification for making minority shareholders of these companies suffer, as it amounts to oppression of minority shareholders by the majority shareholder, which is neither ethical nor legal.  

Section 397 of the Companies Act provides for relief in cases of such oppression by the majority, and the oppressed shareholders can seek a suitable remedy. But here the majority shareholder being Central Government, Ministry of Corporate Affairs will not be the right forum to get this grievance redressed and the investors may have to seek suitable remedy from an appropriate court.

Another dimension to this subsidy muddle is the upheaval caused in the stock market in respect of the market price of these PSU oil companies. The electronic media is full of statements made either by government officials or the company managements on the different versions of this subsidy, which causes considerable volatility in the stock price of these companies. This artificial volatility is neither healthy for the market, nor desirable from the investors' point of view, and the Securities and Exchange Board of India appears to have not taken any steps to contain such statements.

The invisible part of the subsidy mess is the unquantifiable loss caused to the Central Government due to its not getting the right valuations for these oil companies, as the market does not appreciate the uncertainty hanging over the head of these companies, who otherwise are considered jewels in the crown and the pride of the country. The government has, therefore, been forced to defer further divestment from these companies, hurting government coffers as well.

In the interest of both majority and minority shareholders, the government should not only implement the recommendations of the Kirit Parikh Committee immediately, but also absolve these upstream oil companies from the obligation of subsidy completely, thereby creating an environment of good corporate governance in these companies in which it is the majority shareholder.  If it is felt necessary, the government could levy a one-time capital charge on pre-NELP leases granted to these companies as compensation for the loss of revenue in respect of those production blocks, which were leased before the NELP was put in place. This will provide a big relief to upstream oil companies, and minority shareholders of these companies could also breathe a sigh of relief and enjoy the fruits of their investment.

(The author is a banking and financial consultant. He writes for MoneyLife under the pen name 'Gurpur'.)

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