As you all know, privatization is a neo-liberal policy. You can sum up the whole philosophy in just one sentence “The government has no business in business”. Is privatization really good for a country? Is it suitable for the employees and people of this country?
Let us see…
As you all know, recently, the government decided to privatize BPCL (Bharat Petroleum Corporation Limited), the second-biggest refiner in India. BPCL, being a PSU company, had been making profits continuously for a very long time.
Privatization is nothing new for India. In 1991, when India faced a severe economic crisis, the government decided to liberalize, privatize and globalize its economy. And it worked very well! India’s economy improved, bringing in more FDI and increasing its financial strength.
Privatization also reduced red-tapism and various regulations significantly. This allowed the expansion of the economy. Moreover, increased competition in the market meant good for the customers.
But apart from these merits, there are some severe problems with privatization. Like downsizing, employee layoffs, pollution, profiteering etc. So why does the government want to privatize a PSU like BPCL when it makes huge profits?
Is it going to benefit shareholders or harm them? For example, should you hold or sell it if you are an investor and have bought stocks of NSE: BPCL company? Let us try to analyze it.
Oil & Gas Sector in India
Before you learn about the benefits of privatization, you need to have a vague idea of the oil sector in India. The oil sector in India was established in the year 1889. Since then, the sector has expanded rapidly, and today India is 3rd largest oil consumer.
Until COVID 2019, India’s oil consumption was over 5 million barrels per day. By the year 2022, it will cross 5.5 million barrels per day. India is also the 2nd largest oil refiner in the world, with over 250 million metric tons capacity.
ONGC (Oil and Natural Gas Company) is the largest company that contributes about 75% of the total oil production in India. I hope now you will have a fair idea about the Indian oil sector.
Privatization of BPCL
Government is in a privatization drive mood and planning to privatize various Public Sector Units (PSU) in India. BPCL is just one of them. BPCL, a significant stakeholder in the oil sector, will have a major impact on the industry and the country.
The government wants to sell its 53% stake in BPCL to private players. This has led to speculation from the people in the company.
Currently, BPCL has four refineries and over 14,800 retail outlets across India. The company has over 12,000 permanent employees and thousands of contract staff. They have given consistent profits over the last 16 years and were awarded the status of Maharatna in 2017.
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Consequences of BPCL Privatization
How is privatization going to impact the stakeholders?
First, BPCL being a behemoth, its privatization will impact not just a few stakeholders but the entire Indian economy.
BPCL gives a profit of roughly Rs 2050 Crore monthly. The Net profit before the pandemic for the April-June quarter was around Rs 2075 Crore. Thus any decision regarding privatization will affect the economy in the long run.
But the most crucial issue is going to be employment. Privatization tends to have a massive impact on employment. Its thousands of employees were shocked to hear that their company would be privatized.
The impact of privatization of a profitable PSU like BPCL is actually going to be a mixed bag. Let us analyze further …
Advantages of Privatization
Let’s go through the benefits of privatization.
- The first and foremost is an increase in the salaries of the employees.
- It will reduce red-tapism and government interference in the sector, which would increase the efficiency of the companies.
- The privatization will end the cross-holding structure in the oil and gas sector. Cross holding leads to a lack of competition in the market and more conflict of interest in the sector.
- The end of the cross-holding structure will benefit the consumers due to increased competition and lower prices.
- With privatization, the company will make profits, and shareholders will get good returns on their investments.
- Finally, it will reduce the burden on the government, and they can focus on other sectors.
Disadvantages of Privatization
Let us learn some of the disadvantages.
- Why privatize when the PSU is making huge profits? The government may lose out on profits earned by BPCL. There is a controversy on this issue.
- The most crucial concern is the layoff of the employees by the private players. They can shut down various parts of the company to increase profits. There would be no social welfare for the employees.
- Privatization hinders job opportunities. New hiring may stop.
- The oil sector is of strategic importance to the nation. And private players can’t be trusted in a war or any emergency situation.
- Last but not the least is pollution. Private players may not give importance to pollution concerns.
After reading both advantages and disadvantages, you will get a clear idea that privatization will be good for the stakeholders.
What do Financial Institutions Have to Say on BPCL Privatization?
What do you need to know if you are a shareholder of this company and holding its stocks? Well! You can listen straight from the horse’s mouth. I mean industry experts.
1. Analysts from ICICI Securities Ltd, in a Note to Clients, Said the Following.
“Privatization would realize a higher price, may help take politics out of auto fuel pricing, would ensure IOC’s ability to pay a hefty dividend to the government of India is not impaired, and may improve market sentiment as it would be seen as big bang reforms,”.
2. According to analysts at JM Financial Institutional Securities Ltd
“Valuations are not demanding vis-à-vis historical averages; the government of India (GoI) stake sale overhang remains.”
3. Analysts at Prabhudas Lilladher Pvt. Ltd Pointed Out
“The real price discovery of BPCL will happen with a stake sale to foreign/private sector firms. The government had earlier sold its stake in Hindustan Petroleum Corp. Ltd (HPCL) to Oil and Natural Gas Corp. Ltd at a roughly 18% premium to prevailing prices. The premium can be much higher in the case of privatization.”
These quotes from the experts will give you an idea of how the privatization of oil & gas companies like BPCL will benefit stakeholders.