The Hindu : Dominance in petrochemicals

Online edition of India's National Newspaper
Wednesday, May 22, 2002

Opinion

Opinion - Editorials

Dominance in petrochemicals

THE COMPLETION OF the long drawn out strategic sale of Indian Petrochemicals (IPCL) sends out several messages. That the disinvestment programme is gathering momentum is there for all to see. The IPCL sale has been completed days after the change of control at Maruti was announced. Both these are significant milestones though for different reasons. In the Maruti sale, the Government could maximise its receipts despite being burdened with a legacy of restrictive covenants that favoured its equal partner, Suzuki. The IPCL transaction, on the other hand, is seen to represent a new Government resolve to face head on a few major controversial aspects connected with any privatisation programme, those that had actually bogged down this particular sale. Chiefly, Reliance's interest in IPCL, the second largest petrochemical manufacturer, had raised the spectre of market dominance, even monopoly in the industry. While obviously in choosing Reliance the Government has not been swayed by that logic, it is hoped that it will clarify — not only for the individual transaction but for the benefit of macro-economic policy too — those vital issues soon in the light of the proposal to institutionalise competition law and practice in this country. Wherever such laws exist, it has been held that it is not market dominance as much as the abuse of such dominance that should invite intervention. Reliance's successful bid ought to be the trigger for a wider discussion.

The price paid has been the clincher. For the Government's 26 per cent stake in IPCL Reliance is paying Rs. 1,491 crores which at Rs. 231 per share is 81 per cent higher than the next highest bid (of Indian Oil), at Rs. 128 for each share and 76 per cent more than the reserve price of Rs. 131. For the Government, the sale consideration that it receives from Reliance will be the highest for any of its companies that have been divested so far. Reliance will have to make an open offer at the same price to another 20 per cent of IPCL's shareholders, forking out in all Rs. 2,641 crores. Such aggressive bidding has raised the company's worth to Rs. 5,500 crores, far above what the stock market has been valuing it at lately. This in turn points to another major recent gain of the disinvestment programme, the unlocking of the value of public sector shares. The process which began with the sale of CMC and became pronounced during the divestments in VSNL and IBP shows every sign of accelerating. That ought to be good news to the markets and to most public sector companies, whether put up for sale or not.

Reliance's motives in paying such a high price need to be better understood. It is ensuring dominance in the petrochemicals industry with a market share exceeding 70 per cent in most product categories. It will have a near monopoly in some products such as mono-ethylene glycol and ethylene oxide. More importantly, it stands to reap immense synergies arising out of the proximity of its existing manufacturing facilities with those of IPCL. Transportation of feedstock and the finished products through common pipelines will be a major advantage resulting in considerable savings. It is in the marketing arena that the biggest benefits of the acquisition will accrue. The margins of both Reliance and IPCL are bound to go up. The aggressive bidding is justified in another novel way. A premium has to be paid for denying entry to a competitor, in this case the public sector Indian Oil. Ironically, last time while bidding for the petroleum distribution company IBP, the roles were reversed with Reliance losing out to Indian Oil. The gain to the disinvestment programme is that such motivations have been captured in the final price.

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