Oil and Natural Gas Corp (ONGC), India's most profitable firm, will lose the coveted Navaratna status and the accompanying financial autonomy in its rush to the Rs 11,500 crore share sale scheduled next month.
The government plans to withdraw both of its directors on the ONGC board to meet the capital market regulator Sebi's listing norm of having equal number of functional and independent directors to allow Rs 11,500 crore public offering (FPO) on April 5, sources said.
The move would, however, lead to ONGC losing its Navaratna status that gives the company board autonomy to approve investment in its projects and of up to Rs 1,000 crore spending 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, sources said.
The situation has arisen after a blunder by oil ministry in nominating independent directors on ONGC board.
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 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 a CEO of private sector lender for nomination to ONGC board.
However, before the names could go to the Cabinet Committee on Appointments (ACC), Deora was replaced by S Jaipal Reddy.
Reddy did not send the names to ACC till mid-February and then only recommended the names of the IIT professional and HDFC Managing Director Renu Sud Karnad.
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 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 too failed to meet the guidelines and so the government has now decided to withdraw its two government directors to bring down the effective strength to five.
With the appointment of IIT professor, ONGC could meet the SEBI norm.
The government on ONGC board is currently represented by Sudhir Bhargava, Additional Secretary in Oil Ministry and L M Vas from Department of Economic Affairs in 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 board, sources said, adding she and Bhargava both would be withdrawn.
Instead, a nominee each from oil and finance ministries would 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 equal number of executive and non-executive directors on its board.
Besides giving powers to approved unlimited investment in own projects, the Maharatna status allows PSUs to invest up to 15 per cent of their networth or Rs 5,000 crore, whichever is higher, in joint venture companies.
The ONGC follow-on public offer (FPO) through which the government is selling its 5 per cent stake of 427.77 million equity shares, is slated to open on April 5.
Post the offer, the government's stake in ONGC would come down to 69.14 per cent from the current 74.14 per cent.
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 had 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.
