Oil slick on the horizon?

SMARTSHARE

There was a storm on the bourses this Wednesday when it dawned on investors that ONGC, the company with the largest market capitalisation in India might face delisting.

The exploration major remains under GoI control despite its high-profile disinvestments.

It is all set to run foul of a new Sebi listing requirement (Clause 49) that will come into effect from December 2005.

At least 50 per cent of the board of directors of a listed company have to be "independent" (that is, not employees of the company or group).

In the past month, several senior GoI officials, such as the director-general, hydrocarbons and an additional joint secretary of the petroleum ministry have joined the ONGC board.

Under Sebi's definition, GoI officials don't count as independent directors here (and indeed, they shouldn't, since the GoI owns over 50 per cent of the equity).

This means that 11 of the 14 ONGC board members are "executive directors" under the Sebi norms.

Before the new norms come into effect, ONGC or rather, its parent, the petroleum ministry, has to take hard decisions.

Either it sacks several government nominees currently on the board or it inducts a minimum of eight new independent directors and expands the board to 22.

It can also arm-twist Sebi into changing norms or find some other loophole.

The crisis will undoubtedly be resolved and ONGC will remain a listed company. There is simply too much at stake in terms of credibility for the GoI.

And, there's plenty of time to ponder possible solutions. Similar problems are bound to crop up in other listed PSUs, so this case will set important precedents.

But governments being what they are, one will be pleasantly surprised if this crisis is resolved before it goes down to the wire.

A few weeks or months of uncertainty might do interesting things to ONGC's shareprice and thus create a new buying opportunity.

This incident is a classic instance of the mindset that makes people nervous about GoI's policy-making. It is not as though the ministry was unaware of Clause 49; the company had already pointed out the possible problems in writing.

The timing of the appointments is also unfortunate. The appointment of the DG, Hydrocarbons before yet another round of the New Exploration and Licensing Policy (NELP) sends signals out to other bidders that ONGC will enter the auctions holding the high ground.

The sad thing is that this Fortune 500 major doesn't need a boost from its doting parent "" ONGC is perfectly capable of managing its affairs to the satisfaction of all stakeholders.

The opacity of government decision-making processes makes it difficult to assign responsibilities in these situations.

If things blow up, the minister carries the can. In this case, the minister is a high-profile individual who has actively run around reviewing NELP norms and locking up new cross-border fuel-sourcing arrangements, etc.

But at what level are such decisions actually mooted? Is it possible for somebody in somewhat lower echelons of the GoI to deliberately cause uncertainty and quietly profit from it? These are nasty questions.

Will the new Information Act lead to answers? Not without changes in the way that insider trading allegations are investigated.