Privatisation of the Oil Sector

Meaning of Privatisation

Privatisation is the process of transfer of ownership, management, and control of public sector enterprise or industry to the private sector. It aims at providing a tenacious base to the inflow of Foreign Direct Investment. Increased inflow of Foreign Direct Investment improves the financial strength of the economy.

Characteristics of Privatisation

The two main characteristics of Privatisation are:

  1. It restricts government participation in economic activities and safeguards the private sector.
  2. It establishes economic democracy and allows private sectors to operate freely in economic activities.

Ways of Privatisation

Government companies are transformed into private companies in two ways:

Transfer of Ownership

  • By government’s withdrawal from ownership and management of public sector companies.
  • By utter sale of public sector companies.


  • Privatisation of the public sector undertakings by selling off certain assets of the equity of PSUs to the private sector is known as disinvestment.
  • The purpose of the sale is mainly to improve financial discipline and regulation and facilitate modernization.

However, there are six methods of Privatisation:                                 

  • The public sale of shares
  • Public auction
  • Public tender
  • Direct negotiations
  • Transfer of control
  • Lease with a right to purchase

Privatisation in India

The decades between independence and the 90′ witnessed enormous industrialisation, where the government establish companies, and built a strong infrastructure. Post-independence, India had adopted an awfully conservative economy that was practically confined for the outside world. But as time went by, Indian leaders and economists recognized the necessity to merge with the global economy. Thus, in 1991, India went through some major economic reforms.

The notion of disinvestment was first brought up in the year 1991, when the government, outlined the aim of disinvestment as follows:

  • It would broad base the equity
  • Improve management
  • Enhance the provision of resources for these enterprises
  • Generate income for the exchequer

In 1999, when the government classified, public sector into strategic and non-strategic areas, following things were included in the list of Strategic Public Sector Enterprises:

  • Arms and ammunitions, and the related components of defence equipment, defence air-crafts and warships;
  • Atomic energy (except in the areas allied to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries);
  • Railway transportation.

All other Public Sector Enterprises were to be considered as non-strategic. While initially the government proposed disinvestment of up to 26%-50% stake, over the years the policy of the government has undergone a colossal change. At the present day the government is considering the idea of giving up its entire stake in the non-strategic areas where the establishments are running in losses.

The Disinvestment Commission established in 1996 is now the main body governing matters associated with disinvestment. The functions of the disinvestment commission include:

  • Simplifying and aiding the withdrawal of the public sector from non-core strategic areas
  • To assure the workers and employees of job security,
  • Assuring opportunities for retraining and redeployment.

Assuring that any decision to disinvest was to be taken and implemented in a transparent manner.

Issues involved in the HPCL/BPCL disinvestment

Hindustan Petroleum Corporation Limited is an Indian oil and natural gas company established in 1974 with its headquarters at Mumbai, Maharashtra. It has about 25% market-share in India among public-sector companies and a strong build marketing infrastructure. Bharat Petroleum Corporation Limited is an Indian government controlled oil and gas company established in 1952 with its headquarters at Mumbai, Maharashtra. The Corporation operates 2 large refineries of the country located in Kochi and Mumbai.

The main debate surrounding the HPCL and BPCL disinvestment is that, not only are these units running profitably but also that they belong to the oil sector, a sector of strategic importance to the nation.

The government had taken the advice of the Advocate General, who believed that the disinvestment of government equity in the two entities did not require parliamentary approval or sanction. However, this decision to sell majority of shares in Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL) to private parties was challenged and Writ petitions were filed in public interest before the Supreme Court under Article 32 of the Constitution of India.[1]

Following the arguments of the appellants- The Oil Sector Officer’s Association and the Centre for Public Interest Litigation, and the respondents, the Supreme Court, Speaking through, Justice S. Rajendra Babu and Justice G.P. Mathur, on 16th September 2003, ruled that the Centre will have to take prior approval or sanction from the Parliament for selling stakes in the two PSU oil majors – Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd. (BPCL)

The main dissidence put forward by the petitioners, were:

  1. The decision to sell majority of the shares in Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd. to private parties without parliamentary approval or sanction, is contrary to and violative of the provisions of the ESSO (Acquisition of Undertaking in India) Act, 1974, the Burma Shell (Acquisition of Undertaking in India) Act, 1976 and Caltex (Acquisition of Shares of Caltex Oil Refining India Limited and all the Undertakings in India for Caltex India Limited) Act, 1977. 
  2. Whether the two ordinances of the parliament nationalizing the oil sector companies can be reversed by the orders of the executive?

Earlier decision in the BALCO case[2]

The leading issue involved in the BALCO case was regarding, the validity of the decision of the Government of India to disinvest and transfer 51% shares of M/s Bharat Aluminium Company Ltd. The question that arose for regarding that case was, whether such a decision to disinvest is amenable to Judicial Review?

The petition was dismissed and therefore the SC held that, “the process of disinvestment is a policy decision involving complex economic factors. The courts have consistently abstained from interfering with economic decisions because it has been recognized that economic expediencies lack adjudicative disposition and, unless the economic decision, based on economic expediencies is explained to be so contradictory of constitutional or legal limits on power or so adherent to reason, that the courts would decline to intervene”. (It is crucial to note that BALCO wasn’t created by any Act of Parliament) The Supreme Court held that in such a case the suitable forum for testing policy is parliament and not the court.

Rationale for disinvestment

In the viewpoint of legal aspect, it can be said that, BALCO was neither created by an Act of Parliament, nor was it dissolved with any parliamentary mandate. On the contrary, Maruti Udyog Limited where acquisition was through an Act of Parliament, was disinvested through executive decision and Parliamentary approval was not required. But again, Maruti Udyog cannot be considered as a strategically important company to the nation, while oil apparently  the biggest imported items and the largest spender of the foreign reserves, is a sector of vital national importance and shouldn’t be disinvested. The recommendation committee has urged the government, numerous times for the formal declaration of oil as an inclusion to the strategic sector, and the removal of the oil companies from the list of companies proposed to be disinvested. Under the circumstances, the present judgment leaves much bewilderment. The biggest ambiguity is whether what would be easier – to shut down a loss-making PSU, or to make attempts to resurrect it through disinvestment.

The basic jurisprudential theory of ownership as contended by Salmond shows the way to an another point in favour of the suggested disinvestment, similar to as it were to ones basic understanding of the concept itself, “an owner has a right to use or dispose of his property as and how he desires”. Though the parliament created the two Public Sector Undertaking, the ownership vests with the government. Also, while codifying the parliamentary enactments, which created the two oil majors, the parliament has created zero boundaries that stops the government.  Again it was followed by the enactments nationalizing the banks which consecutively lays down for 51% government holding and parliamentary authorisation will be required for any disinvestment below this percentage.

Position against disinvestment

The petitioners argued that the Supreme Court in BALCO judgment allowing disinvestment of the PSU did not apply to HPCL and BPCL, as the aluminium company was not set up by an Act of Parliament. “The two oil companies cannot be privatized via an executive decree,” was accepted as the main contention of the petitioners by court overriding a Parliamentary legislation creating HPCL and BPCL in 1974 after acquiring the assets of the previous ESSO and Burmah Shell.

On a different footing, another thing that comes to mind is, whether the disinvestment policy being followed by the government has drawbacks. On the recommendation of the Advocate General, it was decided to disinvest government shares in the two oil companies. The Supreme Court verdict, making it mandatory to get a parliamentary approval had come at a time when Reliance group had already made its intentions of purchasing HPCL shares quite clear. The due-alertness was on track and finished by Reliance to acquire HPCL. For any non-governmental, private company for the responsibility of its account in the open this would have been reason enough to blame the government. Accepting the fact that Reliance and HPCL are rivalries in the oil industry the government step does not appear to be astute.


Witnessing the past experience, it is true that oil is an important sector of the economy and can grow only with increasing efficiency and that the key to efficiency is competition. It can be said that privatisation in the oil sector would make the consumer happy but the other view is that the oil sector is an important part for development of economy, it may not be correct to leave its absolute control in the hands of private companies. As far as the judgement on the disinvestment policy of government is concerned, the apex court stated that the judgement has no bearing on the disinvestment process, but is limited only to the context of the two oil PSUs.

At the same time it may be said that the issue will pose similar or even more challenging problems sooner or later especially in a country open to democracy but until, then the situation will exist.

A lot of value has to be discovered as far as the govt is concerned. It depends on the process but as far as shareholders are concerned, if it is pure privatisation, it is a marvellous move. It is a good place to be because it’s the first privatisation of “pure retailing company” in this country. But this may not be good news for the other Public Sector Undertaking marketing retail companies because if one gets privatised and two remain with the government, we can imagine what is going to happen to their performance. They will corrode if they are not sold quickly. So, good news for one and bad news for another.  


Ques 1. What is the main aim of Privatisation?

Answer. The main aims of Privatisation are:

  • Providing strong momentum to the inflow of Foreign Direct Investment;
  • Improving the efficiency of the Public Sector Undertaking.

Ques 2. What are the pros of privatisation?

Answer. The pros of Privatisation are:

·         Improved Efficiency

·         Lack of Political Interference

·         Increased in competition


[1] AIR 2003 SC 250

[2] [AIR 2002 SC 1950]



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