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Asking Oil and Natural Gas Corporation and Oil India to pick up 10 per cent stake in Indian Oil Corporation for meeting the divestment target may have invited wrath from some quarters but data suggests cross-holdings were not a lost game for state-run oil majors.
The idea of cross holding was first mooted by the then oil secretary Vijay Kelkar in 1997. Within 15 years of the government divesting 12.5 per cent in ONGC and 10 per cent each in IndianOil and GAIL in favour of other oil companies in 1999, the value has grown almost eight times to Rs 37,000 crore outperforming sensex that grew seven times.
This increase in value is despite IndianOil selling off 1.92 per cent in ONGC and 2.41 per cent in GAIL way back in 2006 for Rs 4,233 crore. Including OIL, which got listed in 2009, the crossholding value stretches to Rs 39,500 crore. The sensex was around 3265 in February 1999 but crossed the 5000-mark during the same year October, following the victory by a BJP-led coalition. It has now grown seven times to 21,832.
“As a long-term investment, IndianOil can be a very good bet for ONGC and OilIndia. At the same time, the government should address policy initiatives and sort out issues related to under recovery and other commercial issues. The value of IOC is more than three-four times higher than its current market cap and hence the investment is worth it,” says R S Sharma, head of the Ficci hydrocarbon committee and former ONGC chairman.
According to experts even if the companies exit IOC within a year which will make them liable to pay capital gains tax of 33 per cent, the investment may turn out to be a best bet for ONGC and OilIndia. Market analyst are, however, not very optimistic. “Both ONGC and Oil India share the subsidy burden. Besides, their domestic production has also been disrupted. So, both desperately require fund to acquire/invest (as can be seen in the recent deals) in producing assets to fulfill the current need of the country. Hence, from the operational point of view, the utilization of fund in the non-core business does not seem be a prudent step for the companies,” says Dhaval Joshi, Research Analyst, Emkay Global Financial Services Ltd.
Even after phase-wise decontrol measures initiated in January 2013, the under-recovery burden on diesel now stands at around Rs 7.16 a litre. In case of kerosene and domestic LPG, oil marketing companies are suffering under-recoveries of Rs 36.34 per litre and Rs 605.80 a cylinder, respectively.
On the other hand, keeping up the tradition intact, during the initial public offering of OIL in 2009, IOC, Hindustan Petroleum Corporation and Bharat Petroleum Corporation were also offered stakes though there is no crossholding in HPCL and BPCL. The crossholding among major oil companies have increased only by 3.45 per cent since 2009 mainly because of tough times being faced by the oil marketing companies due to rise in revenue loss on sale of petroleum products below international prices. ONGC investment in IOC faced the maximum loss with its value going down by 20.89 per cent to Rs 5,732.11 crore compared to Rs 7,245.41 crore then. Sensex by comparison moved up 27.34 per cent since September 2009. The drop in value came after IOC share prices fell to an all-time low close to the divestment plans.
A market analyst also said the government has made ONGC and OIL a scapegoat since foreign investors alienated the divestment plans.
A majority of the huge funds like JPMorgan, Templeton, T Rowe Price, Wellington Management, Aberdeen Asset Management and Schroders had refused to take part in IndianOil roadshows when the government had initially planned to go for a public offer.
But after protests from IndianOil and the ministry of petroleum itself, the government earlier this month got ONGC and OIL together to pay about Rs 5,341 crore for 5 per cent equity share each in IndianOil. The companies had paid Rs 4,643.12 crore to the government for the stake in 1999.
