IOC's belated view of IPCL

Vinod Mathew

THE INDIAN Oil Corporation (IOC) has suddenly discovered numerous virtues in taking over the Vadodara complex of the Indian Petrochemical Corporation Ltd (IPCL).

For industry watchers, it came as no surprise though the whole issue was couched in much hype, including blow by blow accounts of new developments in the disinvestment process. This included the petrochemical units of IPCL being carved up into three separate units based on locational presence.

The November 18 decision of the Cabinet Committee on Disinvestment (CCD), which approved the sale of the Vadodara plant of IPCL is, indeed, old hat. The first proposal to give management control of IPCL, Vadodara, to IOC had come up more than 14 years back, in 1986, while that for the merger of the two units into a third entity came in 1994. Both offers were given the cold shoulder by the Central Government.

That IOC took 14 long years to wake up to the fact that it could not let go IPCL's Vadodara unit only reinforces one's notion about the standard response time of PSUs in vital matters such as mergers and acquisitions. It may be recalled that the same IOC had waited beyond the last date before it made a back door entry, thanks to the Chatterjee Group, in its bid for 25 per cent stake and managerial control of IPCL.

Clearly, it was very much a compulsion for the IOC to ensure that IPCL's Vadodara complex remained out of reach for Reliance Industries as the D-day for bidding as originally conceived, drew closer. By rediscovering the merits of a merger first proposed in 1986, the IOC has ensured a continued flow of the vast range of products from Gujarat Refinery (IOC's Vadodara unit).

Figuring prominently among the products sold by IOC to IPCL are major feedstocks such as kerosene for LAB, naphtha for the gas cracker and along with reformate for the xylene plant, cracked LPG for its propylene facility as also large quantity of fuel for generating power and steam. Moreover, IOC also stands to save annual sales tax outgo to the tune of Rs 100 crore once the two units merge.

Meanwhile, things have got a bit complicated since the merger proposal was first mooted 14 years ago with the IPCL setting up two world class petrochemicals complexes at Nagothane and Gandhar which were commissioned in 1994 and 1999 respectively. The late-in-the-day appreciation of IPCL's Vadodara plant comes at a huge cost making the independent valuation of the single unit quite complicated.

Consider the following:

*The Vadodara unit of IPCL accounts for almost 8,000 of the total 13,400 employees...Can IOC take on all the 8,000?

*No clarity as to how to divide the marketing wherewithal vis-a-vis the distribution network for similar products such as HDPE, lDPE, llDPE, PP and PVC;

*Division of 100 scientists working in the R&D unit at Vadodara;

*Similarly, the division of the catalyst and absorbents manufacturing unit at Thane (CATAD) will throw up innumerable problems;

*Major assets in the form of realty in all the four metros as also regional offices in major towns: Which unit gets what;

*The 180-km pipeline for naphtha, ethylene and propylene between Dahej and Vadodara: Who keeps managerial control;

*Captive jetty put up at Dahej at a cost of about Rs 80 crore -- will IOC take control of that?;

*The 40-odd per cent stake held by IPCL in the Gujarat Chemical Port Terminal Company Ltd (GCPTCL) where the current outgo on committed cargo on `take or pay' basis is Rs 84 crore per annum -- is IOC ready to pick up the recurring tab?

Clearly, there is much to be said in favour of the hiving off of IPCL's Vadodara unit as the proceeds will go a long way towards retiring most of the company's outstanding debts including the company's Euro Bond issue. On the flip side, IOC will not make heavy weather of IPCL's investment plans which have been on hold including the Rs 2,000 crore project to put up a new 4,50,000 naphtha cracker and mothball the existing 1,30,000 tpa cracker.

Interestingly, many have put down the failure of the 14-year-old merger proposal in making a headway to the IOC and IPCL being under two different ministries in the mid-1980s. And now, it will not be one but two Ministries -- Petroleum and Natural Gas on one hand and Chemicals and Fertilisers, on the other -- that will work towards what was logically unavoidable all along -- the merger of IPCL's Vadodara Complex with IOC's Gujarat Refinery. A telling comment on the way the public sector tends to work.