The proximate cause for the underperformance of the shares of these companies is the reintroduction of ‘administered’ pricing. The government does not allow the companies to set the prices of petrol, diesel, kerosene and LPG in line with market prices. The companies are consequently currently losing Rs 3.90, Rs 6.22 and Rs 15.99 for every litre of petrol, diesel and kerosene sold respectively. And Rs 174.17 for every 14.2 kg cylinder of domestic LPG. The estimate is that they will ‘under recover’ (euphemism for loss) around Rs 70,000 crore over FY 2007-08. The reason they are not with the BIFR is because the government has provided them IOUs (oil bonds) and ONGC has accepted part of the burden.

The fact that the ‘navratna’ companies are being pushed to the wall is cause enough for concern. That it is being done so in a manner that suggests a cavalier indifference to good corporate governance is like adding fuel to fire. SEBI and the government have laid down norms for protecting the interests of the shareholders. The Competition Act for instance prohibits ‘predatory pricing’. But the oil companies all charge a common price and that is nothing but predatory behaviour. I have always wondered why non-government shareholders of HPCL, IOC, BPCL have not filed a PIL or taken judicial action.

The most disturbing aspect of the happenings in the oil industry is what it tells us about the nature of decision-making. There is not a bureaucrat, industry expert or perhaps even a politician who individually does not accept that the current policy is storing up a major crisis and that it would be unwise to bequeath a clutch of effectively bankrupt navratnas to future electorates. But at the same time there is a quiet acceptance that politics will always trump economics. This is a reality that exposes the fundamental weakness of our institutionalised decision-making structure.

... contd.