A lesson from Thatcher’s UK

The main source of authentic information about the UK programme is Nigel Lawson’s book, The view from No 11 — No 11, Downing Street is the official residence of the Chancellor of the Exchequer. Lawson was the secretary of energy when they privatised the oil companies and later the chancellor of the exchequer in charge of privatisation.

He asserts that privatisation means almost the same as denationalisation and that Margaret Thatcher disliked the word so much that for some time she refused to use it. It essentially means the transfer of control of an industry or firm from the state to the private sector. The crucial point to note now is that the word ‘private sector’ is used not in the sense of transferring to a single private company a block of shares and control as we seem to think in India, but offer shares to the people who are considered private and not the state.

In fact, one of the main planks of privatisation was to encourage share ownership among the people. Lawson asserts ‘no one was keener than I to achieve the widest possible distribution of shares in the privatised businesses both to small shareholders in general and to their employees in particular…’

In the public offerings, both institutions and individuals could participate but in over subscriptions the institutions had to surrender their allotments to the general public under the ‘claw back’ arrangement. At first Lawson called it ‘peoples’ capitalism’ later Thatcher modified it to ‘popular capitalism’. Lawson calls it the birth of popular capitalism.

The British model was appreciated by many countries and they followed it in their privatisation, particularly of large public sector companies. Apart from wide ownership, the second main plank was to prevent any single company or group from getting control of these blue chip companies.

In the case of the privatisation of British Petroleum, after the public offer of sale was done, Kuwait Investment Office (KIO) started acquiring shares in the market. When it crossed the 10 per cent mark there was concern in BP and also in the government.

The fear of KIO going beyond 20 per cent and seeking a place on the board, let alone control, made the government think in terms of a golden share, which was to enable the government to prevent control of the company from falling into unsuitable (read foreign) hands and this was later pursued in other cases also.

However, it is noteworthy that the government was uneasy about letting a foreign company get even a place on the board, let alone control, over their major oil company. After consultation at the highest levels in government, KIO was asked for the assurance that they would not acquire more than 20 per cent, that they would not pass on the shares to any other company without the concurrence of the government and that they would not seek control or any management role in BP. When KIO refused, the matter was referred to the Monopolies and Mergers Commission (MMC). After the reference was made, KIO agreed to bring down its shareholding to 20 per cent and not to seek board representation. This was too late and MMC, in its report in September 1988, stated that ‘there is a high degree of probability that sooner or later situations will arise in which Kuwait’s national and international interests will come sharply in conflict with BP’s and (the government’s) interests’.

The government accepted this ruling and gave KIO three years to bring down its shareholding to 10 per cent. All this shows the sensitivity in regard to foreign shareholding in an oil company. The other point to note is that in many cases before privatisation the government took a White Paper to Parliament and in some cases legislation had to be passed.

The UK government realised early that it was not wise to rely only on one adviser of the company for the sale and appointed independent advisers to the government on pricing. This was followed in most of the subsequent privatisations. Another feature of the UK programme was the appointment of regulatory bodies to protect the interest of the consumers and the public. They appointed such bodies for oil, gas, water and power.

The Indian Disinvestment Commission studied not only the British model but also other countries which substantially followed the British model, before making its recommendations with adaptations to suit the Indian conditions. The National Share Holding Trust was a substitute for the golden share. Also the residual shares were to be held by the Trust consisting of eminent persons and not by the government as in the case of the golden share which after some time was given up.

The oil companies HPCL and BPCL were created by an Act of Parliament from 1974 to 1976 by which foreign oil companies were nationalised. The present imbroglio on HPCL and BPCL can be resolved if both the petroleum ministry and the DOD move from their present positions, the former by agreeing to give up control and the latter by not insisting on giving the companies to a single private party through strategic sale but to follow the NST route which has been successfully followed in Singapore.

Indian big business should draw the attention of foreign critics to study what happened in their own countries and the concerns they had even about board representation, let alone control, for foreign companies.

The writer is a former chairman, Disinvestment Commission