People's Democracy

 Disinvestment For Whom?

C P Chandrasekhar

THE government, it appears, is desperate to abort the Supreme Court verdict staying the disinvestment of oil majors Hindustan Petroleum Corporation Limited  (HPCL) and Bharat Petroleum Corporation Limited (BPCL). On October 15, in a completely different case relating to privatisation of Jessop & Co being heard in the highest court, the attorney general pleaded for a “serious reconsideration” of the judgment, on the grounds that its “potential ramification and widespread consequences cast a cloud on the entire disinvestments process”.

The attorney general was both correct and wrong. The Supreme Court verdict of September 16 did indeed have widespread ramifications. It stripped the executive of its self-assumed autonomy in the areas of disinvestment and privatisation. The court had in essence ruled that any enterprise created under or transferred to public ownership by parliament cannot be privatised without parliamentary approval. This, in itself, was a major ruling; given the fact that parliament had been by-passed repeatedly in the course of the accelerated privatisation programme adopted by the NDA government in recent times. But the judgment went much further. It provided a definition of public ownership that cannot be violated without parliamentary approval that has far-reaching implications. HPCL and BPCL were units that were acquired in the early 1970s by Acts of parliament that expressly stated that the activities in which they were involved (especially the distribution and marketing of petroleum products) needed to be brought under the aegis of the state. They must, therefore, vest with government companies or units in which the government had a majority stake holding and exercised managerial control.

LEGAL VIOLATION

The proposed disinvestment of the two oil retail majors --- involving the sale of 34.01 per cent of equity in HPCL to a strategic partner who would be offered managerial control and the sale through the market of 35 per cent of public equity in BPCL --- violated both these requirements set by the parliamentary Act acquiring them. The government’s equity stake would have fallen well below 51 per cent given the preexisting shareholding structure, and there would be an explicit or implicit transfer of managerial control. Given that possibility, their sale without parliamentary approval and revision of the Acts concerned was an obvious legal violation.

But, according to a reading of the judgment by the constitutional expert Rajeev Dhavan, in the course of restraining the sale of HPCL and BPCL the two-judge bench went further. It suggested that a process in which a company is set up by the government as an “instrument of service”, even if not through a specific Act, and explicitly provided grants through the government’s budget meets the “technical requirement of parliamentary approval”. Therefore, in such cases too, parliamentary approval for reducing the government’s stake or transferring managerial control to the private sector should be required.

 The highest court’s opinion is clear. If the parliament of India had either explicitly or implicitly approved of a particular unit being run as a government company, then the parliament’s approval is needed for changing the status of the company and handing over control to the private sector.

PARLIAMENTARY APPROVAL

Thus, the HPCL/BPCL judgment completely deprives the government of the right to by-pass parliament implicitly provided by earlier judgments. Those judgments had accepted the view that disinvestment and/or ‘strategic sale’ (involving the transfer of managerial control to an entity acquiring a minority block of shares) were matters of public policy to be left to the executive to decide upon. In fact, one immediate consequence, which had angered the disinvestment minister Arun Shourie, is that the judgment challenged the validity of many, if not all, acts of disinvestments and privatisation undertaken under the reform strategy pursued since 1991.

In this sense the attorney general’s statement before the court that the verdict had major ramifications was right. But neither was his judgment that it had cast a cloud over the disinvestment process nor was his tone of doom regarding the consequent “danger to privatisation” warranted. The verdict does not ban privatisation. It only requires parliamentary approval for the process and introduces a needed corrective to the excessive power wielded by the executive in the area. If the need for privatisation was accepted on the basis of parliamentary approval, the government could go through with it.

Experience indicates that absolving the executive of accountability to parliament has been disastrous from the point of view of economic policy. Originally, privatisation was seen as just one of many initiatives needed to restructure the public sector, and was to be restricted to loss-making units that are best divested. Over time, however, not only has privatisation been made the sole means of public sector restructuring, but it has also been presented as the best option in the case of virtually every profitable public unit.

IDEOLOGICAL THRUST

The view that the government should not have been present in most areas it entered has a two-fold ideological thrust. It presumes that the private sector should be preeminent and the government should undertake an economic activity only when the private sector for one reason or another is unwilling to enter. It also assumes, contrary to the evidence provided by many a public enterprise, that public sector units would by definition be inefficient. The latter assumption allows losses suffered by public units for reasons completely unrelated to efficiency to be attributed to inefficient functioning.  Even ignoring the fact that prejudices of this kind should never be allowed to influence policy, this particular ideological frame should drive the management of the public sector only if supported by a representative majority. Clearly, the post-judgment “confession” by the government and the private sector-controlled media that requiring parliamentary approval for privatisation amounts to dumping the policy is indicative of the fact that nobody believes that such a majority, let alone a consensus on the issue, exists.

Advocates of reform who contend that there is now consensus around it are obviously not willing to subject that view to a democratic test. The reason for this is not hard to find. It emerges from the fact that the process of sale of public assets has involved prices that have been unreasonably low and would not have passed public scrutiny. In the controversies surrounding the privatisation of units varying from Modern Foods to Balco, technical experts have been at pains to point out that the price received by the government for its equity was a fraction of that warranted by the value of the underlying assets. Evidence on the prices of land, mining rights and assets like captive power plants was provided to advance this case.

BREAKING PUBLIC SECTOR DOMINANCE

The executive has at all times chosen to dismiss this view by referring to specious arguments involving accounting principles, stock market prices and discounted present values. Even when Centaur Hotel Mumbai, which the government had sold for Rs 83 crore, was resold within four months by the original buyer for Rs 115 crore, the validity of the argument that either because of its desperation to sell or for other reasons the government was undervaluing public assets was dismissed.

To top it all, the executive decision to resort to “strategic sales” (wherein the purchase of a minority stake at basement bargain prices was adequate to acquire managerial control) in order to attract buyers and make successful the accelerated privatisation programme, was rendering the public sector a site for primitive accumulation by private capital.

 As the VSNL experience illustrated, such strategic sales can provide the private buyer access to resources that made the investment more than lucrative. In this case the Tata group, which purchased the strategic stake in VSNL, tapped the cash reserves of the erstwhile public sector company to finance the expansion of the private company, Tata Teleservices, a telecom start-up the group controlled.  That the government is being driven by strong reasons other than economic rationality even in the BPCL/HPPCL cases comes through from its initial responses to the Supreme Court verdict.

Stating that, “failure to act swiftly and decisively to counter the fallout of the judgment would be viewed adversely,” the government seriously considered four kinds of options: First, to issue an ordinance or enact appropriate legislation empowering the government to disinvest equity in HPCL and BPCL or in any PSU, and go ahead with the process of privatisation. Second, to reopen the issue by seeking a presidential reference under Article 143 of the Constitution that would be placed before a larger Bench. Third, to await any fresh case that may come up as a result of this judgment or otherwise and that allows the government to reopen the issue before a larger Bench and seek a reversal of the ruling.  Finally, pursue an option that emanates from an interpretation that the judgment does not prohibit sale of companies that are not nationalised through Acts of parliament. As part of this option, it was suggested that Indian Oil Corporation, which was not constituted through an Act of parliament could be split up, the non-saleable parts merged with HPCL and BPCL and the rest broken into two, one of which is sold to a strategic partner and another to the public.

Since there is no guarantee of success with the first two of these options which requires either parliamentary support or a Supreme Court reversal, it is clear that the government is veering round to relying on the latter two options. Despite opposition from within the NDA government (especially the petroleum minister), from the IOC union and officers and from the public, the IOC split is still being considered. Meanwhile, the government has decided to use the case relating to sick enterprise Jessop & Co  To influence the Supreme Court into changing a judgment which relates to the successful oil majors HPCL and BPCL.

HELPING PRIVATE PRODUCERS

The desperation to stay the course and the sudden attempt to bring IOC into the disinvestment ambit indicates that the government in this case is being driven by the desire to break public sector dominance over distribution of petroleum products. IOC controls 52 per cent of the marketing network, and its sale can realize this objective even if HPCL and BPCL, which together hold the rest, cannot be privatised. Why this urgent desire to change the distribution scenario through privatisation rather than new private entry, which is being permitted? Raising that question, some commentators are seeing in the government’s moves an effort to enhance the position of private petroleum producers, especially a major like Reliance, which has no presence in distribution and would have to set up full distribution network at considerable cost if it is to compete in that market rather than distribute through the public sector. If this is true, the aim of privatisation here is not to restructure the public sector but to favour a private player, which already has a monopoly in some segments of the petrochemical industry. If so, privatisation is once again being used as the route to primitive accumulation by private capital in the country. This only justifies the Supreme Court’s decision to curb the possibly misuse of its power by the executive.