IOC-IBP swap ratio under lens

Finance ministry feels IBP was overvalued.

The finance ministry has asked for a review of the IBP-Indian Oil Corporation swap ratio of 1:1.25, saying that it is not favourable to the government.

Finance ministry officials said they were of the opinion that IBP was overvalued in the merger, resulting in a loss in the government's stake in IndianOil post-merger.

Indian Oil executives said less than 1 per cent of the Centre's holdings in the company would be extinguished after the merger.

The share's price over six months (prior to December 2004), the expected earning potential of IBP and the company's valuation were taken into consideration while deciding the swap ratio, they added.

The finance ministry's comments were sought because the proposal is to be approved by the Cabinet Committee on Economic Affairs. The ministry's recommendations were sent to the petroleum ministry recently.

At present, the government holds 82.03 per cent in Indian Oil with the rest held by the public, financial institutions and foreign institutional investors. At the end of March 2005, IndianOil held a 53.58 per cent stake in IBP, while the rest was held by FIIs, banks, mutual funds and the public.

According to the proposal cleared by the boards of the two companies in December 2004, the 11.87 million IBP shares held by Indian Oil will be transferred to a trust.

Finance ministry officials said the IBP-Indian Oil swap ratio had also raised issues regarding the merger process and valuation methods to be adopted for public sector companies.

"In the coming days, consolidation in the public sector will be a dominant theme and the government needs to put in place norms for it. We intend to take up the issue in the coming days to ensure that the government's interests are adequately protected," an official said.

As part of greater autonomy to the 'navratna' PSUs, freedom on merger and acquisition is being proposed. Based on recommendations of the ad-hoc committee headed by Arjun Sengupta, the proposal to empower PSUs is expected to be considered by the cabinet by the month end.

In April 2004, the IOC board had approved the proposal to merge IBP as two separate entities engaged in the oil marketing business were seen to be creating a conflict in the operations and management.

The merger is likely to result in a reduction in overhead expenses by about Rs 45 crore a year and also lead to more effective utilisation of cash flows and increased market capitalisation.