State-owned oil firms, which bought government’s shares in each other, are sitting on handsome gains worth several times their initial investment.
In the late 1990s, the government sold its shares in Oil and Natural Gas Corporation (ONGC), GAIL and Indian Oil Corp (IOC) in a bid to raise funds. According to the so-called cross-holding plan, ONGC bought 9.1 per cent in IOC and 4.83 per cent in GAIL. IOC bought 9.61 per cent in ONGC and 4.83 per cent in GAIL. GAIL in turn bought 2.4 per cent in ONGC.
The government raked in Rs 4,643 crore from these transactions, according to the department of disinvestment website www.divest.nic.in.
In 2006, IOC sold 1.92 per cent, or roughly a fifth of its holdings in ONGC for Rs 3,672 crore, recovering its entire initial investment and some more. It also sold half its holdings (2.41 per cent) in GAIL for Rs 561 crore, again netting manifold gains. A study by BS Research Bureau showed the remaining cross-holdings are now worth Rs 32,961 crore, a gain of seven times. If one adds the proceeds of the 2006 market sale by IOC, the value swells to Rs 37,914 crore.
This is thrice the sum the companies would have earned if they had put the cash in bank fixed deposits or similar instruments. According to market estimates, the cash would have earned them an average six per cent annually, net of tax, . In comparison, the compounded annual growth rate (CAGR) of cross-holdings stood at 19 per cent over a 12-year period.
The returns provided by the cross-holdings also easily beat annualised BSE Sensex returns of 13.43 per cent during the period. Bulk of these gains came from the growth in valuation of ONGC & GAIL, after listing on the stock exchanges. Both companies have grown 10 times since the cross purchases.
The exploration major was valued at Rs 23,150 crore during the stake sale. On Wednesday, it has a market capitalisation of Rs 2,33,564 crore. GAIL’s valuation has shot up to Rs 51,000 crore from Rs 5,000 crore. IOC, valued at Rs 15,000 crore 12 years ago, had a market value of Rs 65,000 crore at on Wednesday’s close.
Analysts say the gains on the crossholdings are notional and the firms do not have the flexibility to encash these when they need to. In addition to these valuation gains, the companies have also earned a combined dividend of around Rs 8,800 crore from these cross-holdings, beginning FY 2000.
According to exchange data, IOC was the biggest gainer, having received dividends of Rs 5,017 crore from ONGC and Rs 269 crore from GAIL. ONGC received Rs 1,739 crore from IOC and Rs 398 crore from GAIL as dividend. GAIL earned a dividend of Rs 1,420 crore from its investments in ONGC.
| HOLDING GOLD | |||
| Shareholding pattern as on Sep 2011 (A) | |||
| Company | Share holders | % holding | Value Rs cr* |
| GAIL (India) | ONGC | 4.83 | 2,464.77 |
| GAIL (India) | IOCL | 241 | 1,232.38 |
| IOCL | ONGC | 8.77 | 5,689.92 |
| ONGC | GAIL | 2.40 | 5,612.91 |
| ONGC | IOCL | 7.69 | 17,961.31 |
| Total (A) | 32,961.29 | ||
| Shares Sold in 2006 (B) | % stake | Value Rs cr* | |
| ONGC | IOCL | 1.92 | 3,672.00 |
| GAIL (India) | IOCL | 2.42 | 561.00 |
| Total Value (A+B) | 37,194.29 | ||
| Less: Cost of acquisition | 4,643.00 | ||
| Net gain in value | 32,551.29 | ||
| CAGR 12 Year (%) | 18.93 | ||
| Sensex CAGR 12 Year (%) | 13.43 | ||
| * Value according to price on Dec 07,11 Data compiled by BS Research Bureau | |||
In 1997, then petroleum secretary Vijay Kelkar first mooted the idea of cross-holdings by state-owned firms in the oil sector as a precursor to vertical integration. This idea was partially implemented as part of the divestment programme with three of these companies buying a minority stake in the others directly from the government.
The sale was made in two tranches. According to the www.divest.nic.in, the government raised Rs 4,184 crore in the financial year 98-99 and the remaining Rs 459 crore in 1999-2000.
According to a white paper by ICICI securities on PSU disinvestments, the government can raise up to Rs 13,442 crore through such strategic cross- purchases this year.
