Jaitley said the CPSEs will be integrated across the value chain of an industry through consolidation, mergers and acquisitions. “By these methods it will give them capacity to bear higher risks, avail economies...
of scale, take higher investment decisions and create more value for the stakeholders, he added. Possibilities of such restructuring are visible in the oil and gas sector.”
Outlining its policy on oil majors, the government also proposes to create an integrated public sector ‘oil major’ which will be able to match the performance of international and domestic private sector oil and gas companies.
Thus, after over a decade of debate, the government has finally given its go ahead for creating entities with global scale by merging public sector oil firms.
"The Budget has laid the policy. Integration is the need of the hour. Globally, M&A (mergers and acquisitions) is the trend in the oil industry. With the policy in place, companies will chalk out mergers and acquisitions in accordance to their strength and weaknesses. We will see M&A activities in the public sector oil industry in coming days," oil minister Dharmendra Pradhan was quoted as telling a leading daily after the big announcement by Jaitley in Parliament.
However, it will be the smaller and standalone ventures that will be merged to fit the missing links in the hydrocarbons value chain of each brand.
"The proposal will provide scale and muscle, which can be leveraged in the global market," GAIL chairman B C Tripathi said. ONGC chairman D K Sarraf said the new entity could have a market capitalisation of about $80-90 billion and compete with global giants on its own.
The merger route - whether by creating a holding company like in the case of Coal India Ltd or individual M&A - is not clear yet. There are altogether 13 oil PSUs. The top eight listed PSUs have a combined market cap of $80 billion, and a merged entity would become the ninth largest globally.
A merger plan involving the five biggies - IOC, ONGC, BPCL and HPCL and GAIL - was first mooted during the previous NDA regime when Atal Bihari Vajpayee government was in power. Ram Naik was the oil minister. Subsequently, Mani Shankar Aiyar revived the plan during the UPA-I regime.
But in September 2015, a panel on recast of PSU oil companies did not favour mergers, and instead suggested greater autonomy by transferring government shareholding to a professionally managed trust. The Advisory Committee on Synergy in Energy, headed by V Krishnamurthy, said M&A worldwide occurred during times of low oil prices and were instruments of eliminating excess workforce and duplicate facilities.
Apart from the major merger announcement, the Budget gave a boost to energy security by sanctioning two more strategic oil reserves at Chandikhole in Odisha and Bikaner in Rajasthan to take the reserve capacity to 15.33 million tonnes. This will raise India's storage to 90 days' consumption, on a par with the international benchmarks.
The idea of a gas-based economy received a boost in reduction of basic customs duty on liquid gas imported in ships (LNG) from 5 percent to 2.5 percent.