"...in this world, nothing can be said to be certain except death and taxes," America's founding father Benjamin Franklin once wrote. And in a post-COVID world, the last part of that line could read ...death and higher taxes.
The government yesterday hiked excise duty on petrol and diesel steeply. The prices at the petrol pump will remain unchanged even after the hikes, but then shouldn’t the consumers have got the benefit of lower crude prices.
It is true that in a developing economy like India, the benefits of lower crude prices cannot be fully passed on to consumers. But it is also true that we are now taxing these products higher than most countries. In fact, roughly 70 percent of the price that motorists pay at the pump goes to state and central government coffers.
Let me make one thing clear. I sympathise with the government and its primary objective of looking after the weaker section of the society. You and I are not the target audience of any government measures in this environment. You and I are actually the means to finance those good measures and I completely agree that this is a time in which the “haves” contribute for the “have nots”.
But governments must find a middle ground when faced with the choice between raising taxes and passing on the benefit of lower prices.
In this instance, higher petrol and diesel prices beyond a point have consequences for the economy. Everyone suffers, including the very people whom the government wants to help. Anyway that’s a different topic and I am not addressing that. I am looking at things from the stock market's perspective.
Let us look at the shareholding pattern of all the oil marketing companies – starting with the biggest one, IOC: 51.5 percent is held by the government which is the promoter and the largest shareholder. Then there are cross holdings by other PSU oil companies like Oil India and ONGC which is roughly 23.5 percent. So 75 percent is held by the government and other PSUs. Institutions own another 20.6 percent and the rest is held by retail shareholders.
Now look at the stock, which gets a premium from the market because the government wants to sell it to a strategic player: BPCL. Now, the main reason BPCL gets a premium valuation is because of the impending divestment and also because it is held more widely compared to IOC. Here, the government owns roughly 53 percent and there are no cross holdings. The BPCL Investment trust holds another 9 percent and institutions own 32.5 percent.
Now let’s look at HPCL, the stock which gets the least valuation from market, especially after its ownership was transferred to ONGC. Fifty one percent of it is owned by ONGC and roughly 40 percent of it is owned by institutions.
Why am I making these shareholding points? For 2-3 reasons. For starters, this kind of adhocism in taxation might serve the near term purpose of shoring up the revenues but what about the medium to long term price damage?
At a market capitalization of Rs 1 lakh crore, the government wanted a premium for its 53 percent stake in BPCL and for good reason. You do not sell a national asset unless the price is top dollar. Since then of course, we have had a bear market and prices have collapsed. But as we speak, the market cap of BPCL is down to almost Rs 72,000 crores and hence the value of government stake is also down proportionately.
And with this step (of raising excise taxes), no big strategic player would be willing to buy majority stake in the company. So if your hope was that in 2020 you would be able to sell BPCL and raise large money, that’s not going to happen. Now you could argue that things will change in a post-COVID world and things would get back to normal again. But the messaging is clear: this sector will always be under government control and will never have free pricing. So the government is taking the biggest hit! It’s like the story of golden goose we read in our childhood. You always take one egg a day and do not kill it by trying to take all eggs at one go.
Secondly, while the government holds majority stake in these companies, the institutions and public at large also owns a large stake. For example, in HPCL, almost half of the holding is with institutions and retail investors. They have invested in these companies with the logic of valuations, profitability, return on equity, book value etc. From a shareholder point of view, he cares little about the social obligation of the government. Their primary decision in investing in a stock is to get good returns. And dividend cannot be the only way to tell a minority shareholder that he is being rewarded. In fact, on such large issues where the valuations and market caps of large firms can take a big hit, shouldn’t the promoter consult the minority shareholders? Forget about taking approval of the majority of the minority shareholders.
As I said, the reasons behind this move are obvious. The government needs money and petrol, diesel has been an easy source of revenue, besides alcohol (for all governments, I might add here). But there is a serious argument that if a sector is going regularly face so much intervention and so much uncertainty, perhaps there is a case for these companies to be not listed. Because listed companies have to think about maximizing profit and value for shareholders.
First Published: IST