ONGC, OIL to bail out govt on IOC disinvestment

An EGoM on Thursday approved the sale of 10% govt stake in IOC to upstream majors to raise Rs 4,800-5,000 cr

Oil and Natural Gas Corporation (ONGC) and Oil India will bail out the government on disinvestment in Indian Oil Corporation (IOC) by acquiring 10 per cent equity in the country’s largest petroleum retailer by next week.

On Thursday, an empowered group of ministers (EGoM) headed by Finance Minister P Chidambaram approved the sale of 10 per cent government stake in IOC to the upstream majors to raise Rs 4,800-5,000 crore. The sale of 242.7 million shares in the company was approved, though it wasn’t decided how much stake each company would acquire.

Experts said this would have a negative impact on the balance sheets of ONGC and Oil India.

The government’s decision follows a tussle between the petroleum and finance ministries, as the former, led by M Veerappa Moily, had objected to selling IOC shares in the market “at a throw-away price”.

“We have decided to go for a block deal. The modalities will be decided later,” Moily said.

ONGC already holds 8.77 per cent stake in IOC.

“This is not a strategic buy, but, of course, not a bad buy. About five per cent stake in IOC would cost us about Rs 2,200 crore, without any lock-in period. Therefore, this would not have any impact on our capital expenditure plans,” said A K Banerjee, director (finance), ONGC.

While Oil India is sitting on a cash pile of Rs 8,000 crore, IOC’s cash reserves stand at about Rs 6,000 crore.

“After the stake buy, we will be left with around Rs 2,800 crore of reserves for the next financial year. We have a capex plan of Rs 36,000 crore for the next financial year. Of this, internal generation is expected to be about Rs 32,000 crore, which means the deficit may be about Rs 4,000 crore,” Banerjee added.

Petroleum Secretary Vivek Rae said now, IOC shares were under-priced, adding though a block deal wasn’t the preferable route, this step had to be taken to raise Rs 4,800-5,000 crore. “The company board would meet soon and pass a resolution,” he added.

While the IOC stock closed at Rs 212.05 on the BSE on Thursday, up 1.48 per cent, ONGC shares fell 1.48 per cent to close at Rs 287. The Oil India stock closed at Rs 477.4, down 0.55 per cent.

The government holds 78.92 per cent in IOC. Though divestment in the company was planned on January 9, 2013, it was deferred due to a fall in share prices.

The finance ministry had pushed the move to meet its disinvestment target of Rs 40,000 crore for this financial year. Early this month, the EGoM dropped the plan to go to the market.

“As of now, there is no clarity on the ratio/proposition of the sale of stake. Assuming 60:40 (in favour of ONGC and OIL, respectively), it is a negative for upstream companies. Moreover, on the operational front, both companies are a part of the subsidy burden and their domestic production has also been disrupted. Both companies are in dire need of funds to acquire/invest in producing assets to fulfil the current need of the country as much as they can. Hence, the utilisation of funds in non-core businesses does not seem be a prudent step for the companies,” said Dhaval Joshi, research analyst, Emkay Global Financial Services.