Who will be IPCL's strategic partner?

Raghuvir Srinivasan

AFTER three protracted, painful and unsuccessful years, the Indian Petrochemicals Corporation Ltd's (IPCL) divestment process is back to where it began in February 1999.

By deciding to sell off a controlling 51 per cent stake in the whole of IPCL, the Government has implicitly acknowledged the fallacy of its earlier attempt to carve up IPCL and sell it off in parts. It has now set itself a stiff 90-day deadline to complete the first stage of selling off the 26 per cent stake in the company.

While sticking to the deadline would be a challenging task, the critical question is: Who could be IPCL's potential suitors? Last time around, when the government advertised its intention to sell a strategic stake in IPCL, the offer attracted some of the biggest names.

These included players such as Chemicals, Mitsubishi Chemicals, BP-Amoco and Shell, apart from Reliance Industries and The Chatterjee-Soros combine which operates Haldia Petrochemicals. While Shell and BP-Amoco pulled out even before the due diligence stage, Dow Chemicals almost made it there but finally dropped out. Mitsubishi was, ultimately, the only foreign company to show any real interest in IPCL before the Government messed up the entire process.

Given the experience of these MNCs earlier the question of who could bid for IPCL this time around assumes greater importance. The three years that the IPCL divestment has dragged on has seen significant changes in the global petrochemicals industry. The industry is now riding the trough of the commodity wave and the slowdown in major economies such as the United States and Japan, two big consumers of petrochemical commodities, has laid producers low.

Prices of major petrochemical commodities are depressed with the consequent impact on margins. There is even talk of surplus global capacity in some commodities leading to a slowdown in fresh capacity investment by the leading producers.

IPCL has also undergone some significant changes in this period. The top management has transformed with some of its top executives credited with the success of the company either retiring or seeking other opportunities.

The company's finances are also arguably not as strong as it was three years ago, courtesy the slowdown in the domestic economy. Though the new gas-based complex at Gandhar is now stabilised, the Vadodara complex, which is its oldest and runs on naphtha, is in dire need of modernisation.

The 1.30 lakh-tonne cracker in Vadodara needs to be upgraded and its capacity increased with simultaneous upgradation of downstream capacities. Vadodara alone has been estimated as needing an investment of Rs 2,000 crore. The Nagothane complex which is also gas-based has been identified for capacity expansion but feedstock problems have held back such plans.

Market dynamics in India are also not as simple as they were three years ago. The entry of Haldia Petrochemicals and Gas Authority of India (GAIL) has led to increased competition at a time of falling demand. This has had the necessary impact on realisations and margins as companies extend discounts and longer credit periods to protect their existing business.

It is in this backdrop that the Government has now renewed its bid to sell off a strategic stake in IPCL. The timing is anything but propitious. If the bad experience of the MNC bidders with the earlier divestment attempt is a big minus, the present global outlook for the industry is likely to make them ignore the IPCL divestment.

With cost-cutting being the prime focus and investment plans on the backburner, global petrochemical companies can hardly be expected to be attracted by the IPCL offer. The threat from the IPCL unions that they will not take the privatisation lying down is an added disincentive for any prospective foreign bidder.

Counting out the MNCs from the process, we would be left with the probable domestic bidders -- Reliance Industries, The Chatterjee Group and, possibly, Indian Oil Corporation (IOC). Given IOC's desire to become an integrated energy company with interests spanning from oil refining to petrochemicals and power generation, it can be fairly assumed to be a possible bidder now.

But there is the sticky issue to be resolved of whether a public sector company can be permitted to bid for another when the whole issue is one of privatisation. Besides, there are also other problems such as the necessity to get prior government sanction for the bid amount which would make it public.

That would leave us, theoretically, with The Chatterjee Group and Reliance Industries. The former has its hands full with Haldia Petrochemicals and its financial problems.

The company is grappling with a large capital base which it wants to reduce even as the Tatas, one of the partners in the project, have been blowing hot and cold about withdrawing from the project.

The Chatterjee Group may thus not want to take on another issue on its hands; which means that we would be left with just Reliance Industries as the sole bidder. Now, that would be a piquant situation indeed.

The Disinvestment Commission, in its earlier avatar headed by the irrepressible Mr. G. V. Ramakrishna, had said that the IPCL sell-off should be done in a manner that would not lead to a monopoly in the domestic industry. What he was hinting at was quite clear -- that Reliance Industries should be disqualified from bidding for IPCL. That was given the go by in the earlier disinvestment attempt when Reliance even did a due diligence on IPCL.

Would Mr Arun Shourie, the Minister for Disinvestment, now think and act differently? Would he, in other words, think on the same lines as Mr. Ramakrishna and disqualify Reliance Industries from the IPCL sale? To be sure, these questions are premature and would arise only if Reliance throws its hat into the ring, which is not a remote possibility.

Mr Shourie would then be confronted with a very difficult situation -- allowing Reliance Industries could lead to a monopoly in the domestic industry while disqualifying it could mean that the IPCL sale falters again. Which way will he decide?