View from Delhi: Court verdict upsets divestment process

It was one of those weeks when nothing goes right. First, there was the fiasco at Cancun, which brought the ministerial meeting of WTO to a dead halt. Then nearer home, came an unexpected rebuke from the Supreme Court asking the central government not to proceed with privatisation of oil companies without getting an okay from the parliament.

The collapse of the Cancun summit is a temporary development but many people fear that it may affect foreign investment. The talks are supposed to have failed because of the insistence of rich nations to include foreign investment in the agenda. But things will probably be sorted out in Geneva in December when the general council of WTO is slated to meet.

The supreme court judgement is a far more serious matter as it impinges directly on the privatisation process. The court says that the two oil companies, HPCL (Hindustan Petroleum Co Ltd) and BPCL (Bharat Petroleum Co. Ltd) which were to be privatised, were nationalised by an act of parliament and only the parliament can undo the takeover.

This has completely upset the divestment process as the government does not have a majority in the parliament to push through the privatisation bill. Popular sentiment in the country is also against it.

Teams of foreign companies, including Chevron and Shell were actually visiting the offices of HPCL and BPCL to do their due diligence exercise when the court order came. The teams promptly left the premises and went home. They are unlikely to return soon as, for all practical purposes, privatisation is off.

Shell was getting read to acquire 74 per cent of HPCL's equity and use the company for its growing operations in India. It has a licence to open 2,000 petrol pumps and has a big LNG marketing program-me on hand.

Critical juncture

The question now is whether other government companies, such as Maruti Udyog which has already been privatised, and Bharat Heavy Electricals or BHEL which is next on the list, can also be affected by the ruling. The divestment minister says, yes, it can.

Government lawyers say no, but they have proved wrong in the case of oil companies and are not very sure about themselves.

The Cancun affair is not so serious, at least in the short run. As far as foreign investment is concerned, India was doing pretty well - though not as well as China - with whatever FDI it got, and foreign exchange has not been much of a problem. The finance ministry has just decided to repay over a billion dollars worth of loans before time.

Incidentally, it is still raining in India and there are hopes of a super-bumper crop this year. So for a year at least, India will be sitting pretty, Cancun or no Cancun!

The writer is an India-based senior economic advisor.