Dithering over the sale of 5% of ONGC raises basic questions about the government’s disinvestment strategy.
If Rs 40,000-crore disinvestment target has become a challenge for the government this year, its dithering on selling five per cent stake in its largest company, Oil and Natural Gas Corporation (ONGC), has thrown open to debate as to whether the sell-off policy itself is flawed in the current circumstances. Consider this: ONGC share price was almost Rs 1,300 a piece in January this year. It is now Rs 264.
Part of the reason for the share price being so drastically low is the share split which the company implemented in January in preparation for disinvestment. Though the share split and the share price itself may not be proof enough for a negative perception of the government’s one step forward and two steps back moves in coming out with a follow-on issue, it does reflect the market mood.
Share split being a mere book entry does not really make a difference to a company’s fundamentals though it increases the number of shares with an equity holder thereby increasing his or her options of offloading. While admitting that the only reason why the company went in for a share split was the proposed follow-on issue, a senior ONGC executive says the move proved beneficial for the company since it has seen greater retail participation. “We have in fact seen an increase in number of retail investors because the stock has become more affordable.” There are about 5,38,000 retail investors in the company now, an increase of about one lakh since the share split.
However, market analysts like Jagannadham Thunuguntla, strategist and head research, SMC Global Securities Ltd, say the share split and bonus issue did not make an “iota of a difference” to investors. What impacted them was the uncertainty. “Investors do not like such surprises. It is better to stick to a timeline,” he says.
ONGC filed the red herring prospectus with the Securities Exchange Board of India (Sebi) on September 5 for sale of 5 per cent equity but by September 16, the plan changed. The company informed the stock exchange that the promoters had decided to put on hold the follow-on issue. This happened just four days before the issue was to open on September 20. The government just said that it believed in the inherent strength of ONGC and that the decision on the issue “will be evaluated in due course keeping in view all relevant factors”. Prior to the announcement, conflicting rumours on the issue and its pricing caused fluctuations in the share price. Short sellers exited the company in anticipation of buying the shares at a discounted rate during the FPO but incurred heavy loss when the announcement for postponement came in.
An email query to disinvestment secretary on the uncertainty created in the scrip by FPO plans and then its postponement did not get any direct reply. “Any further information is likely to add to speculation and therefore, we would not like to share anything other than what has already been informed to the general public by way of a Press Release (announcing postponement) dated 16th September, 2011,” says an email from the ministry.
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It could well be argued that it was speculators who posted losses and long-term retail and institutional investors have nothing to fear. Besides, the real reason why the government decided to postpone the issue was to avoid valuing the company at a lower level. An overwhelming response to the initial public offer of Coal India last year has forced certain quarters within the government to draw a comparison to the current circumstances and to ponder whether risking public issues of good public sector performers in the current market condition is a good idea. As Thunuguntla points out to absorb a $2.5-billion public issue in current market conditions is going to be a challenge.
Former ONGC chairman RS Sharma says the Indian stock market has been the worst performer this year among economies of the same size but says market appetite can be flexible depending on shares of which company are being offered. “Investor confidence in the Indian market is not very positive. There are issues of governance, corruption with a perception that reforms are not on track but large investors look for opportunity where their money can fetch good returns,” he says.
| Disadvantaged disinvestments The government that is hoping to raise Rs 40,000 crore through selling of its stake in some of the profitable public sector companies could raise only Rs 4,660 crore in the first half of the financial year through a follow-on issue of Power Finance Corporation. |
Certainly, only a magical stock market can get it the remaining Rs 35,000 crore or so in the second half. The interesting point here is that of Rs 12,661 crore raised through a public issues during April-September 2011, PFC issue cornered almost 37 per cent, making the government-controlled company the biggest issuer of shares so far this year.
Now, with the PFC scrip trading below the issue price, the department of disinvestment is looking at other ways of raising Rs 40,000 crore. Asking cash rich companies to buy their own shares or buy into peers by purchasing part of government holding are ideas making the rounds.
These are fraught with dangers. As former ONGC chairman RS Sharma points out even the value of existing crossholdings in the oil companies have been eroded due to the subsidy tangle. Clearly, the focus has shifted from creating value for the companies and investors to that of financing its government deficit.
Though Sharma agrees that if the government had gone ahead with the ONGC follow-on issue, it would have headed for a disaster, he is critical of the way the entire issue has been handled. “It is disturbing. One round of roadshows had already happened when the announcement for postponement came,” says Sharma.
Though ONGC is an upstream oil and gas producing company and ideally should have benefited from high oil prices, the challenge it faces is nothing related to its core business. The sharing of subsidy with its peers in the oil marketing business is what disturbs the company’s performance. The government has so far shied away from spelling out any formula for subsidy sharing for ONGC and other upstream companies. If it was one third of the total burden earlier, last year it crossed the number with the government picking the bill for only 52 per cent of the total subsidy of about Rs 78,000 crore. In 2008-09, the upstream companies shared 70 per cent of Rs 103,292 crore revenue loss on sale of auto and cooking fuels.
The government has even overlooked suggestions from the company on evolving a clear matrix for this. What comes after the end of every quarter is an arbitrary number from the ministry of petroleum and natural gas giving out the value of subsidy that is extended in the form of discounts to the OMCs. As Sharma aptly puts it, “Investors want transparency on issues facing the company. Instead of providing that what came out was confusion.”