ONGC – HPCL: Fiefdom mentality

Last week the Hindustan Petroleum Corporation Limited (HPCL) recognised the Oil and Natural Gas Corporation (ONGC) as its promoter in a revised filing with the Securities and Exchange Board of India (SEBI). It could have, and should have, done it long ago as ONGC had acquired the government's entire stake in early 2018, and, by doing so, ONGC had become the major shareholder in HPCL with more than half the shares.

Why was there so much delay and why did HPCL drag its feet?

Though there were technical reasons and procedural explanations being forwarded by HPCL, it is quite obvious that the top management in HPCL was not willing to give away the almost full-fledged functioning autonomy enjoyed earlier. Using any other words may give some different meaning, however, "functioning autonomy" has often been mistakenly understood to include using one's position in exercising the so-called "discretion" in a convenient manner suiting one's preferences and choices. In cases where discretion could be exercised within a certain broad bandwidth – rather than extremely narrow interpretation, or using fully objective criteria – these have been treated as fiefdoms for awarding contracts, giving employments, encouraging cronyism, earning loyalty from subordinates by practising the policy of "quid pro quo", identifying and creating opportunities for mixing work and leisure with family and friends on company's expense, etc.

It is not easy to break anyone's fiefdom, and when it is a matter of a public sector undertaking with very heavy stakes, the task becomes even more difficult. This has been precisely the situation in the instant case. It is a sad reflection on the practise of corporate governance norms, not only recommended or desirable but made mandatory by SEBI. The government had planned and executed its decision to create a bigger entity in the business of oil and gas, which can, possibly, be compared with the global giants. In the international market, the bargaining power of companies depends, among other things, on their size and ranking in the international listing of companies, like the Fortune 500 list of companies. Indian government-owned companies – like Indian Oil Corporation (IOC), Hindustan Petroleum, Bharat Petroleum, etc. – have been much lower in the list as compared to other national oil companies like Aramco of Saudi Arabia, Russian Gazprom, Malaysian Petronas, Brazilian Petrobras, PetroChina, and several others.

To get the benefits of economies of scale and find better synergy between business entities, rather than competing with each other, the move has been thought about by business and strategic consultants and executed by the government, as the ultimate decision making power is with the government in most of the companies. Though there are independent boards to give direction to business, yet government's control is definitely experienced indirectly, if not directly. In the mid-1970s, there was a move made by the government to nationalise private oil companies, which resulted in the formation of HPCL from the then existing Esso and Caltex, and the Bharat Petroleum Corporation Limited (BPCL) from the Burmah Shell. These companies had their own history and traditions of conducting business, which were harmonised for uniformity with the working of public sector undertakings in India.

It is all dynamic with nationalised entities like IOC, HPCL and BPCL competing on the service parameters for several decades, as prices of petrol, diesel and liquefied petroleum gas (LPG) remain same across these companies; dealing with lubricants and other miscellaneous products has mostly been competitive. The idea of creating separate and small entities at that time was to create manageable units and not to let any one company monopolise the situation.

We should not worry about such a situation with strong and big private companies competing with public companies, and, hence, must make vested interests shed their fiefdom mentality.

The author is a professor at IIM-A, akagarwal@iima.ac.in