People's Democracy

              ONGC Disinvestment: The Mother Of All Scams

WARREN Buffett and India’s disinvestment exercise have a stark interpretive connection. How cheaply shares of six of the prized public sector companies were sold recently in the market is best illustrated by Buffett to whom ‘the most striking thing … is how many financial assets are still too expensive for his tastes.’ "Everything is too pricey", he declares, and "risk is ill rewarded."… "Yesterday’s weeds are today being priced as flowers," says Buffett. The result is that his Berkshire Hathaway is now sitting on a cash pile of $36 billion, much of it in government securities although, as he puts it, these pay "pathetically low interest". He concludes: "the pain of doing something stupid is potentially worse." These are sage words indeed from the man popularly known in his circles as the ‘sage of Omaha.’ This explains a certain weariness on the part of the most prolific player in equities about the market. The corporate misdemeanours, accounting frauds and CEO excesses in the US and elsewhere in the capitalist world have obviously sapped his appetite for investment profits.

What has all this to do with Indian government’s disinvest- ment exercise, one may wonder. Oh Yes it has. As we said already, it has illustrative or interpretive relationship, for Warren Buffett is reported to have picked up quite a large percentage of the shares of ONGC that was up for grabs and it is not known what else. And Buffet, like George Soros, revels in purchasing economies and not just shares of companies. He along with Soros was the financier of the regime change that the US wanted in Georgia. US imperialism’s doctrine of regime change employs different methods and operatives. It could be through military invasion as in Iraq, abduction of the duly elected prime minister as in Haiti, subversion by the CIA and such other agencies as was the case in many countries and/or through outright financial subversion as happed in several countries and more recently in Georgia.

If the investment weary Buffett and his ilk were to salivate and show extraordinary interest in the six plum Indian public sector stocks that were disinvested recently, including the ONGC, it only indicates the very low band prices that were fixed by the government that was anxious to garner the most resources before March end in order to bridge the yawning gap in its fiscal management and incidentally show how India indeed was shining. And, what a way for a country to shine!

That the floor prices were fixed at impermissible discounts is apparent to any observer and it does not require market expertise or the enthusiastic entry of the likes of Buffett to know this. The floor prices fixed were much lower than even the reigning prices quoted in the market for these shares. Here are the details:

Price on NSE  Price                 Offer Price*               Realisation*

 March 18 *                                                                   (Rs.in crore)

IPCL     — Rs.188.00               195.70          170              1,200

CMC    —535.00                      541.50          485              190

IBP       — 604.00                     717.50          620              352

DCI     — 509.00                      —                 400              221

GAIL   — 210.00                      —                 195             1,620

ONGC — 853.00                     —                  750            10,500

——————

* Source: Disinvestment Ministry Web Site.

IBP’s shares were divested in February 2002, through what is known as strategic sale to IOC, another public sector oil company. The latter then purchased as much as 33 per cent of the shares of IBP at a government administered price of Rs 1,551 per share. Later IOC was asked to purchase another tranche of 20 per cent of shares from market at the same rate. In the present exercise however, the government has offloaded its remaining 26 per cent shares in IBP at a very low price of Rs 620 per share. About 57.58 lakh shares have been sold at this rate. This is an unheard of discount of Rs 931 per share. Two things happen by this exercise: one is the value of IBP stock held by the IOC at the behest of the government depreciates in value to the extent of Rs 536.07 crore, if not more. Second aspect is that conversely, the private entities purchasing these shares, who admittedly are mostly big investors including foreign institutional investors have been given a discount in price to a minimum extent of Rs 536.07 crore. What explanation the ruling NDA would give to this government-organised loot?

This is not the first time that the NDA government did something so stupid or diabolic, whichever way one might call it. In November 1999 soon after coming to power, the government sold 25 per cent of its holding in GAIL at a grossly under-priced value of Rs 70 per share that was 3 to 4 times less than the prevailing market price incurring a loss of as much as Rs 1,500 crore. This was compounded by the fact that much of these shares were sold to competitors like British Gas and Enron. The present exercise of sale of 10 per cent of shares of GAIL and ONGC would lead to a loss of around Rs 6,000 crore at a modest estimate.

In transactions of this kind it is customary to take into account what is called the ‘price-earning ratio’ or the ‘price-revenue ratio.’ which is the offered share price divided by earning/revenue per share. Earnings per share are determined by dividing the earnings for the past twelve months by the number of common shares outstanding. A higher multiple would indicate to the investor that higher growth could materialise inducing him to bid at a higher price than normal. The bench mark could also be that of similarly placed oil majors like BP, Exxon-Mobil, Royal Dutch Petroleum etc. Reckoned by these standards, the price could well be much higher than the offered price, say 20 times the earning per share. Where the equity base is higher as in the case of ONGC and GAIL, this ratio would normally be still higher.

The fact that this relates to oil whose reserves are dangerously dwindling and are irreplaceable in direct proportion to the demand/consumption increasing, the share value could be expected to carry a greater weightage than the quoted price in the market. Normally, in such transactions, the possible future value also should come for reckoning. But when the value is pitched much less than the prevailing market price, one could immediately smell something fishy is going on.

Disinvestment is a misnomer for the practice of selling juicy public sector shares to private entities. It amounts to selling present wealth of the country and what is more, prospects of future accretion of wealth. Privatisation of profit making public sector units is bad enough, but when they are sold cheap and the proceeds are utilised to feed the profligacy of the government, without creating new productive assets, it is worse. Profligacy of the government lies not only in its wasteful spending but also in its largesse through tax concessions and the like given to those who ought to be contributing to resource mobilisation. This amounts to the government itself helping to loot national economy. There cannot be a worse crime than this. The crime is compounded when the shares are sold at far less than the intrinsic market value, which at any rate can be depressed by foul means particularly before the shares are divested as happens normally and as has happened in a brazen manner in the present instance.

Considering that four of the six public sector units under disinvestment are connected with oil, a precious, irreplaceable and dwindling resource and oil related industries, the gravity can be well understood. All countries in the world are trying to protect and develop oil and energy resources. The industrial countries like the US are finding themselves vulnerable because of dwindling reserves and are out to control other countries’ oil resources. The infamous war of occupation of Iraq was precisely for this. Attempts are being made to destabilise the democratically elected government of Venezuela because that country is unwilling to allow its oil industry to be continued to be dominated by the US.

India’s dependence on oil imports is notorious. This is partly because the country has failed to develop its oil resource potential ever since the process of economic liberalisation commenced. Whatever development took place in this respect was through establishment of ONGC and other facilities for prospecting, drilling, pumping out, refining and distributing oil and oil related products in the public sector after great deal of effort, material and technological. Still India is a long way from achieving self-sufficiency; far from it, the country is chronically dependent on imports. From 30 per cent at the time of the first Gulf War in 1991, India’s dependency on imports has increased to 73 per cent by March 2003. By the end of this year, India would be importing 75 per cent of its needs. The burden is all the more because of the volatility of international oil prices. One friendly and reliable source Iraq, has now gone. One dollar per barrel increase in oil price would increase the country’s import bill by $550 to 600 million per year. International oil prices are now perched at a 14 year high at $38 per barrel for light crude and are dangerously moving in an upward trajectory. So much so, even the US and such other countries are worried. The over statement of oil reserves by Royal Dutch Shell has not been taken kindly by the investors and that has resulted in not only the head of the CEO rolling, but has sent shock waves across the globe about the perceived oil reserves available. The US itself had to acknowledge that its own reserves are dangerously low. An editorial comment in the New York Times in its issue dated March 22, 2004, cautioned that it was a much more sensible option for the US to curtail consumption than to allow its strategic oil reserves to further dwindle.

It is at this juncture the BJP-led NDA government is trifling with the sensitive industry and recklessly allowing private and foreign entry that could prove to be the thin end of the wedge later on, particularly when the investors are the likes of Warren Buffett. And all this not to prospect and develop more the country’s potential by infusing fresh capital, not for developing technology and not for producing more, but to part bridge the deficit in the fiscal situation and that too after giving the unconscionable bonanza of tax concessions to the better off sections to the extent of Rs11,000 crore at the time of the recent interim budgetary exercise. And, the realisation through the present disinvestment exercise would not be very much more being estimated at Rs.14,083 crore. Knowledgeable observers say that the present price increase would mean a cost overrun of around $3.5 billion in the import bill from around $16.5 billion. Obviously the retail prices of oil products would be increased across the board after the elections. The increase would be stiff though the public sector units that are being destabilised in a big way would once again be asked to bear a considerable portion of the burden. That means already a big hole to the extent of Rs 3,500 crore in the disinvestment proceeds has already resulted even before the disinvestment exercise could be completed. The question arises all the more what for this stupid – or is it nefarious – exercise.

A recently published book Oil Factor by the leading financial adviser Stephen Leeb and Donna Leeb, mentions what is obvious to all excepting the most chronic among those believing that something would work out: "For the last 30 years, the price of oil has been the single most important determinant of the economy and the stock market." The authors claim that the oil price would soar above $100 a barrel "by the end of the decade, and possibly sooner". Such an eventuality, they say, would drag the global economy into a severe recession. As already said the price of oil per barrel is riding a 14 year high at $38 and is still moving up. Whether the oil price soars to $100 per barrel or not, it is not going to stay put at the present level. This gloomy scenario is sufficient to bring caution to the most incorrigible optimist and induce him to tread carefully in this domain. Such caution and humility is not to be expected from the NDA government or its disinvestment minister, Arun Shourie. The incorrigible brat that he is, he would call anyone expressing caution or disapproval of his ways as "idiotic", as he did the Comptroller and Auditor General of India in respect of his report that the sale of Centaur Hotel in Mumbai cost the exchequer Rs 145 crore.

Shourie let the cat out of the bag when confronted with the question whether such high discounts and going to the market with such large bundle of sensitive shares in February/March were unavoidable, particularly when the country was faced with a huge democratic exercise of the elections and whether an interim government should be doing this. He replied unabashedly: "There’s very little that we can do as the disinvestment proceeds are required by North Block (Finance Ministry) by the end of the current fiscal to arrive at the magic figure of the fisc." (Frontline, March 26, 2004) Obviously the fiscal deficit of the centre was precarious and had to be dressed up or ‘sexed up’ to use the now famous BBC expression on Britain’s dossier on WMD that Iraq allegedly possessed. This was required to add some credibility to the dubious ‘India Shining’ campaign.

The decision to opt for market oriented sale rather than strategic one preferred on earlier occasions is based on the feeling that the sale should be widely distributed rather than concentrated in the hands of a single or small group of investors, who could become potential threat to the industry itself. These are days of mergers and acquisitions and hostile takeovers. The investment climate in the west not being rosy, world investors are coveting plum assets in countries like India. A national government should be conscious of this reality and be extremely cautious. But that is not the forte of this reckless government that would trifle with irreplaceable national assets. How irresponsible the government has been is further illustrated by the following facts. The government opted for market sale abandoning its earlier preference of so-called strategic sale to a preferred private entity after this came in for severe public criticism. But all caution has been thrown to the winds and the bulk of the purchase has been made by private institutional investors, that too of foreign origin.

In an earlier exercise of disinvestment, the SEBI expressed doubts about the misuse of participatory notes that enabled hot money from unknown sources being pumped in. So this was abolished and it was insisted that the source must be known and routed through registered brokers. After the first few days of the exercise, when the FIIs were obviously playing coy and testing the market, the disinvestment minister Arun Shourie went into one of his tantrums and accused some forces of trying to sabotage the exercise by pulling the market down. Pray, what was he expecting from the market, a red carpet? Thereafter the government in a panic reaction coerced the SEBI to reintroduce the system of participatory note that it so recently banished with much fanfare and rhetoric. And the tap for foreign investors picking up the offered shares with glee commenced. At such discounts the over subscription is hardly an event to be celebrated. The government is blissfully ignorant what percentage was picked up by whom and what could be the source of the money that was pumped in! One thing is for certain; the FIIs were major participants who benefited.

The government also acted with total lack of concern in its choice of merchant bankers who managed the issues, the preferred ones being the likes of HSBC Securities, Kotak Mahindra Capital, ICICI Securities, DSP Merrill Lynch and JM Morgan Stanley. The Indian public sector banks that traditionally had mutually beneficial partnership in crude oil imports, including the SBI Caps were significantly brushed aside. It is a shame that the government displayed such utter lack of confidence in its own institutions in managing such high profile issues.

Answering the media after the ONGC issue was oversubscribed, a gleeful Shourie replied he was not certain whether Warren Buffett, one of the world’s biggest and notorious investors, had made a bid for Rs 7,000 crore. But he added: "But if an astute investor like him has put money in ONGC, it is a vote for India." Asked about the possibility of a special allocation for high profile investment funds such as those owned by Buffet he said, "I certainly attach importance to such dominant investor funds. Investors like him give a two to three year time horizon for their investments." (The Hindu, March 6, 2004) What an appalling ignorance of the potential danger involved! And, Warren Buffett is one with close connections with American Oil interests and its military-industrial complex. Besides, as already mentioned, he revels in buying up economies and not just companies.

BALCO, Modern Foods, ITDC Hotels, Jessop, Paradeep Phosphate, HCI Hotels, VSNL. Maruti Udyog and now IBP, DCI, IPCL, CMC, GAIL and ONGC. The list is long and pertains to disinvestment alone. We are not even talking of other monumental scams like UTI, Ketan Parekh and stock market related ones, Tehelka, Coffin, Telgi exposure and the like. The list is long, very long indeed. But then was it not the same outfit that during its thirteen day sojourn in power approved the Enron deal providing for 16 per cent investment return with adjustment to currency fluctuation and a counter guarantee to boot. If it was a thirteen day wonder at that time, it is caretaker government at present. Then and now ethics is the farthest from its concerns.

With such lot of muck sticking all over, the BJP-led NDA government has the gall to go to the people with the claim of ‘India Shining’ and seek their votes. This time around however, the people will not be any more gullible and give them their just desserts and show the way out of office.