Shareholder S Wealth Creation in India Post Deregulation of Petrol Prices

Shareholder’s wealth creation in India post deregulation of petrol prices

*Dr. Shashank Bhushan Lall

** Shubhadeep Chakraborty

______

Abstract: The study examines the effect of deregulation of petrol prices upon the wealth creation process of the shareholders of the Indian oil marketing companies. The Government of India has deregulated the petrol prices since 25th June 2010 and has allowed the oil marketing companies to link the retail selling prices of petrol to the market. The liberty in fixation of prices has a long lasting impact upon the wealth creation possibility of the shareholders of the oil marketing companies. International crude prices have off late been caught in a bearish trend which has pushed the international crude oil prices to new lows. This has reduced the import cost of crude oil for India and has helped in taming the inflationary trends in our country. Indian oil marketing companies too have benefited from this bearish trend as their under recoveries have come down considerably. Efficient cost management and free pricings of petrol have helped in increasing share price returns and creation of wealth for the shareholders of these companies. With partial deregulation the finances of Government of India has improved a lot due to huge savings in oil subsidies. The results of petrol deregulation is so positive that The Government of India is seriously contemplating about deregulating the diesel too from her control and make the retail selling price of diesel market linked.

Key words: Deregulation, Petrol prices, wealth maximization, oil marketing companies

* Dr.. Shashank Bhushan Lall is an Associate Professor at Patna University, Patna.

(E): [email protected], (M):+91 94310 77491

**Shubhadeep Chakraborty is an Assistant Professor in the area of Finance at Amity Patna.

(E): [email protected], (M): +91 99312 37224

I. INTRODUCTION: The Indian oil and gas sector besides being vast has a tremendous macroeconomic importance as well. It is one of the eight core industries that are the part of the IIP (Index for industrial production). Petroleum products are the main sources of energy in our country and in case of industrial production; it is one of the main input components. Any changes in the price of diesel, petrol etc has a cascading effect upon the overall cost of production and ultimately the end price of the product. From the macroeconomic point of view, its importance can be gauged by the fact that every year the Government of India has been spending astronomical amounts of financial resources by way of paying subsidies to the oil and gas sector. This sector is one of the heavily subsidized sectors and the main motive of the Government to do so is to prevent the Indian economy from inflationary shocks arising due to India’s heavy dependency upon imported crude oil as well as imported inflation. On the other hand, payment of such huge amounts of subsidies over the years has inflicted considerable amount of fiscal pains upon the Government of India. In fact oil subsidies have been the major contributors in high fiscal and current account deficits. It had been suggested since long that The Government does away with the subsidies and liberalizes the sector so that the financial burden may be lessened. The Government was unwilling to do so and wanted to continue subsidizing the sector because she apprehended that by doing away with the subsides and allowing free pricing, inflation will skyrocket and the common people shall be over burdened. But mounting fiscal deficits (mainly due to oil subsidies) kept the inflation as well as the interest rates high, affecting the investment climate in the economy negatively. Finally the Government of India on the 20th of June 2010, decided to deregulate the Indian oil and gas sector partially by allowing the free pricing of petrol. Diesel, kerosene and LPG are still under Government regulation. This decision of the Government has financial and investment related implications not only for herself but also for the entire Indian oil and gas sector, her stakeholders as well as the public in general.

In light of the above, it becomes highly imperative to make an attempt to study the impact the partial deregulation has upon the Government’s revenues, upon the returns and wealth creation of the share holders of the Government owned oil marketing companies and upon the overall growth and development of the entire Indian oil & gas industry.

II. OBJECTIVES OF STUDY: i) To study if deregulation of the Indian oil sector has a positive impact and is successful in creating a confident future for the Indian oil sector. ii) To test if deregulation helps in creating wealth and value for the shareholders of the oil companies by improving the share returns.

III. Hypothesis:

Ho≠ Deregulation will not affect the share prices of the oil marketing companies

H1= Deregulation will affect the share prices of the oil companies strongly

H2= Deregulation will affect the share prices of the oil companies moderately.

IV. REVIEW OF LITERATURE:

The International institute for sustainable development global studies initiatives (2012) has observed that the current regime of energy subsidies in India is a heavy burden on the Government’s resources and has only limited success in reaching the intended beneficiaries. Subsidies also put a lot of pressure on national oil companies and power sector utilities, which face heavy financial burdens under the current system.

Rangarajan Committee Report (2006) this report recommended that international (or “trade parity”) prices be used as a reference for a more market-based approach to pricing of petrol and diesel. It also recommended that subsidized kerosene should be restricted to below poverty line (BPL) families and the retail price of LPG be raised, with any remaining subsidies financed directly from the budget.

Kelkar Committee Report, 2012. This report set out a “roadmap for fiscal consolidation”, including a timeline for the reduction of fuel subsidies. It recommended the elimination of diesel subsidies over a two-year period followed by full price deregulation in 2014. It also recommended the elimination of LPG subsidies over a period of three years, and the reduction of more politically sensitive kerosene subsidies by one-third over the same period.

Parikh Committee Report (2010) has recommended that the prices of petrol and diesel be fully liberalized, both at refinery gate and at the pump. It also recommended that: (i) subsidized kerosene sold through the public distribution system (PDS) be targeted to BPL families, and its price raised each year according to the growth in nominal agricultural GDP per capita; (ii) the price of kerosene sold outside of the PDS system be set close to that of diesel to eliminate incentives for diversion; and (iii) subsidized LPG should be quantity rationed, or replaced by direct cash transfers to BPL households with LPG prices fully liberalized.

V. Research Methodology: a) Sources of data:

Secondary source has been used to collect the relevant data. Since the deregulation of petrol prices on 25th June 2010, petrol prices have undergone 57 (approx.) revisions. All the 57 (approx.) price revisions have been taken into consideration as the average price of petrol in the four metros (Delhi, Kolkata. Mumbai and Chennai) on the dates of the petrol price revisions. The petrol price changes pertain to the three Government owned upstream oil companies and the three Government owned downstream oil companies. The post deregulation period ranging from 26th June 2010 to 1st July 2014. The share prices have been sourced from the Bombay Stock Exchange. b) Statistical tools used are:

 Correlation analysis

 Regression analysis

 Coefficient of determination (R²)

 Beta estimation (β)

IV. ANALYSIS:

a) Calculation of correlation between petrol prices and market price per share of Indian Oil Corporation after deregulation (26/06/2010 to 15/08/2014):

(x-xµ)

(Y-Yµ)

(x-xµ)² (Y-Yµ)²

∑ ((x-xµ)(Y- Yµ)

78.42 4.36 76.42

7.75 76.31

5.75 77.19

5.64 78.16

6.52 77.41

7.49 76.79

6.74 75.84

6.12 75.33

5.17 76.77

4.66 80.71

6.1 78.68

10.04 75.75

8.01 74.88

5.08 72.96

4.21 73.32

2.29 71.04

2.65 68.55

0.37 67.61

-2.11 67.26

-3.05 70.38

-3.40 71.62

-0.28 72.68

0.95 72.68

2.01 75.17

2.01 73.42

4.50 71.56

2.75 71.87

0.89 71.79

1.20 71.47

1.12 72.60

0.80 72.31

1.93 72.98

1.64 72.98

2.31 72.37

2.31 71.53

1.7 74.47 0.86

-11.45

-14.54

-14.88

-15.65

-15.93

-16.03

254.20

351.5 -21.1 373.2

76.2 240.71

97.9 255.19

-34.59 296.63

-20.11 250.11

21.33 230.5

-25.19 203.7

-44.8 206.1

-71.6 204.9

-69.2 232.65

-70.4 209.35

-42.65 195.75

-65.95 227

-79.55 212.65

-48.3 234.55

-62.65 252.2

-40.75 285.7

-23.1 265.56

10.4 216.65

-9.74 246.32

-58.65 284.35

-28.98 283.68

9.05 316.95

8.38 298.8

41.65 314.9

23.5 348.95

39.6 296.35

73.65 281.43

21.05 215.64

6.13 346.97

-59.66 311.05

71.67 280.25

35.75 301

4.95 284.7

25.7 255

9.4 263.2 -20.3

-41.85

124.95

102.85

-51.62

-58.75

-72.3 19.00

100.90

0.64 3.75

131.10

211.48

221.41

221.63

244.92

253.84

257.04

445.21

5806.44

9584.41

1196.468

404.4121

454.9689

634.5361

2007.04

5126.56

4788.64

4956.16

1819.023

4349.403

6328.203

2332.89

3925.023

1660.563

533.61

108.16

94.8676

3439.823

839.8404

81.9025

70.2244

1734.723

552.25

1568.16

5424.323

443.1025

37.5769

3559.316

5136.589

1278.063

24.5025

660.49

88.36 412.09

146.41

1488.416

3102.49

1751.423

15612.5

10578.12

9135.536

7867.69

739.84

1166.223

172.3969

2664.624

3451.563

0.1024

204.49

5227.29

-91.996

590.55

Xµ=∑X/N 562.925 -195.088

-131.117 = 3887.212/55 159.7617

-169.781 =70.67 -274.176

-370.172

-322.472 ∑(x-xµ)= -429.44

-428.206

0.29 -528.26

-404.114

-203.343

-143.469

Yµ=∑Y/N -107.988 -8.547

-21.944 =15141.84/55 29.707

199.41 = 275.30 8.1144

8.5975 ∑(Y-Yµ)= 16.8438

83.7165

0.34 105.75

∑(x-xµ)²= 65.5485 25.26

6.8656 2526.64 -47.728

138.3231

11.4345 ∑(Y-Yµ)² = 59.367

15.98 145345.32

∑ ((x-xµ)(Y- Yµ)=

785.0892

Corr (x, y) = 0.04b)Calculation of regression coefficient with the above variables:Testing Y on X=0.310Testing X on Y=0.0054, Coefficient of regression = √0.310* 0.0054 = 0.040C)Calculation of coefficient of determination: (r) ²= (0.04)² = 0.0016d) Calculation of Beta (β):β = Cov (y, x) / ∑(x-xµ) ²β = 785.0892 / 2526.64 = 0.310b) Calculation of correlation between petrol prices and market price per share of Hindustan Petroleum Corporation limited after deregulation (26/06/2010 to 15/08/2014)