The government has deferred the share sale of state-owned Oil and Natural Gas Corp (ONGC) to the second half of 2011 following a faux pas in appointment of independent directors on the company board.
The government plans to sell 5%, or 427.77 million equity shares, through the follow-on public offer (FPO) to raise up to Rs 12,000 crore.
"The share sale was to open on April 5, but has now been deferred. It is now likely in the second quarter of 2011-12," an official with direct knowledge of the matter said.
ONGC does not meet market regulator Sebi's listing norm of having an equal number of functional and independent directors and the government had planned to withdraw both its nominee directors on the board to push the FPO through.
But the move would have led to ONGC losing its coveted Navaratna status that gives the company board autonomy to approve an investment of any size on projects and powers to invest up to Rs 1,000 crore in a joint venture company.
According to the norms, a Navaratna board can exercise its limitless powers only when it has government-nominated directors on board. Upon withdrawal of such directors, ONGC will have to seek nod of the Public Investment Board (PIB) for any spending of over Rs 100 crore, the official said.
"The consequences of withdrawing government directors were too grave and so the it has been decided to make regular appointment of independent directors and till such time, the FPO will be deferred," he said.
A search committee will be appointed and suitable persons appointed by the Cabinet Committee on Appointment (ACC), he said adding the process may take 2-3 months.
ONGC has six functional directors, besides the chairman. It also has two government-appointed nominee directors, taking the total strength of functional/promoter directors to nine. Against this, it currently has four independent directors and needs five more to meet the SEBI's listing norm.
Sources said that last year, the ministry -- under the then minister Murli Deora -- had selected five persons, including a chartered accountant, an IIT-Mumbai professor and the CEO of private sector lender for nomination to ONGC board.
But before the names could go to the ACC, S Jaipal Reddy replaced Deora. Reddy only sent the names of the IIT professional and HDFC Managing Director Renu Sud Karnad to ACC for approval.
His logic was that since ONGC did not have a permanent chairman after the retirement of R S Sharma and the vacancies of Director (Human Resources) and Director (Exploration) were unfilled, the effective board strength was down to six and only two independent directors were needed to meet SEBI norm.
But before the ACC could approve, S V Rao was appointed Director (Exploration), taking the effective board strength to seven.
Also, it came to light that a serving executive in any company cannot be appointed as independent director on a PSU board, sources said, explaining the reasons for rejection of Karnad's candidature.
The remaining three persons chosen by the Oil Ministry also failed to meet the guidelines and so it was decided to withdraw its two government directors to bring down the effective strength to five.
With the appointment of the IIT professor, whose candidature meets all norms, ONGC would have met the SEBI norm, the official said, adding that the government has decided not to resort to a shortcut and instead make regular appointment.
Post-FPO, the government's stake in ONGC would come down to 69.14% from the current 74.14%.
The government is currently represented on ONGC's board by Sudhir Bhargava, Additional Secretary in the Oil Ministry, and L M Vas from the Department of Economic Affairs in the Finance Ministry.
Vas has since become Special Secretary and as per tradition, only officials up to the rank of additional secretary are appointed on ONGC's board, sources said, adding that she and Bhargava were to be withdrawn.
Instead, a nominee each from the oil and finance ministries was to be made permanent invitee on the board, which would not be enough to meet the requirement for exercising Navaratna powers, they said.
In fact, ONGC was conferred the higher Maharatna status and greater financial autonomy, but the state-owned firm could never exercise it as it did not meet the requirement of having an equal number of executive and non-executive directors on its board.
Besides giving powers to approved unlimited investment in its own projects, the Maharatna status allows PSUs to invest up to 15% of their net worth, or Rs 5,000 crore, whichever is higher, in joint venture companies.
Sources said that ONGC was ready with its red-herring prospectus (RHP) for the FPO, but was awaiting the appointment of one independent director on its board to meet market regulator SEBI's listing requirement.
ONGC last month received the report of independent auditors who certified the company's oil and gas reserves, a mandatory requirement for explorers making public offers.
A group of ministers headed by Finance Minister Pranab Mukherjee would decide on a price band for the FPO on April 1.
Bank of America Corp, Nomura Holdings, HSBC Holdings Plc, JM Financial Services, Citigroup Inc and Morgan Stanley are managing the FPO.