Ques 10) Case Study (Compulsory)

The public sector Indian Oil Corporation (IOC), the major oil refining and marketing company which was also
the canalising agency for oil imports and the highest ranked Indian company in the Fortune 500, in terms of
sales, planned to make foray into the foreign market by acquiring a substantial stake in the Balal Oil field in
Iran of the Premier oil. The project was estimated to have recoverable oil reserves of about 11 million tonnes
and IOC was supposed to get nearly four million tonnes.

When IOC started talking to the Iranian company for the acquisition in October 1998, oil prices were at rock
bottom (U.S. $11 per barrel) and most refining companies were closing shop due to falling margins. Indeed, a
number of good oil properties in the Middle East were up for sale. Using this opportunity, several developing
countries “made a killing by acquiring oil equities abroad”.

IOC, being a public sector company, needed government’s permission to invest abroad. Application by Indian
company for investing abroad is to be scrutinised by a special committee represented by the Reserve Bank of
India and the Finance and Commerce Ministries. By the time the government gave the clearance for the
acquisition in December 1999 (i.e., more than a year after the application was made), the prices had bounced
back to U.S. $24 per barrel. And the Elf of France had virtually took away the deal from under IOC’s nose by
acquiring the Premier Oil.

The RBI, which gave IOC approval for U.S. $15 million investment, took more than a year for clearing the deal
because the structure for such investments were not in place, it was reported.

Questions:
1) Discuss internal, domestic and global environments of business revealed by this case.

One Possible Solution

Internal/domestic environments
1) The business decision making process in Indian government sector is pretty slow which leads to
unnecessary loss of time and money. In this case, the slow process leads the company to loss of opportunity
to buy a firm (premier Oil).
2) There are much more than required levels of clearances that needs to be taken to acquire a company abroad.
Application is reviewed by members of special committee of RBI, Finance and commerce ministries. Since
three organizations are involved in the clearance process, it increases the time to take a concrete decision. It
would have been better if there was a single window from where all required clearances could be taken.
3) Indian opened its market in 1991 and by 1998 it should have such a policy already in place to avoid
unnecessary delay. This is an example of inability to predict the future business opportunities.

Global Environment
1) The global environment is very much competitive. There are companies which will take away the chance in
just a blink of an eye.
2) The policies are company friendly and it allows companies to acquire other companies abroad seamlessly.
3) They had better government regulation and faster process which resulted in their getting govt. clearance
quickly and take away the deal from IOC.

2) How Elf, France could acquire Premier Oil in time? Even if Elf would not have acquired, what would
have been the impact of the delay in the clearance on IOC?

One Possible Solution

Elf had agreed with IOC for acquisition, The IOC being a public sector company had to file application for
investing abroad. Then the application has to get scrutinised by a special committee represented by the Reserve
Bank of India and the Finance and Commerce Ministries. By the time the government gave the clearance for the
acquisition in December 1999 (i.e., more than a year after the application was made), the prices had bounced
back to U.S. $24 per barrel. IOC was too late to join hands with Elf, therefore, Elf acquires Premier oil wasting
no more time.
If Elf would not have acquired Premier oil, and had waited for IOC then the impact of delay in the clearance of
IOC would be that, since the oil prices raised to $24 from $11 in the meanwhile the cost of acquiring the
company would have more than doubled. And the amount for approval was just U.S. $15 million investment,
which was less for the acquisition.

3) What are the major issues confronting the domestic governments in concluding the overseas
investments of similar nature? Please list out your solutions in this regard.

One Possible Solution

Long Procedures: The legal procedures of domestic government are obsolete and time taking. This affects the
companies in timely implementation of projects and investments.
Delay in Decision Making: Governments take too long time to make decisions for any investment related to
foreign countries.
Poor Management: The management process of the domestic government is very poor. Therefore, attempt
should be taken to improve the functioning of the government.

The solution to the above given issues can be new committee for investment decisions should be made, the
decision making process should to cut short so that faster decisions are made, rules and regulations should be
reviewed.

4) What are the lessons to be learned of this case?

One Possible Solution

1) Fast Decision Making: The decision making process should be fast or one will loose the opportunity to the
competitors. As it there is a saying “Strike while the iron is hot”
2) Plan the future: One should be able to predict the future business opportunities and make preparations for
them in advance to avoid any unnecessary delay.
3) Time Limit: There should be some time limit for making decisions.
4) Separate committee: A separate committee should be made by RBI to review the acquisition matters and
provide approval in time.