Government decides to sell 10% IOC stake to ONGC, OIL

A group of ministers led by India's finance minister P Chidambaram yesterday decided to sell of 10 per cent of the government's stake in Indian Oil Corp, India's largest public sector refiner and oil marketing company, to two state owned explorers, Oil & Natural Gas Corp (ONGC) and Oil India Ltd (OIL), in order to meet its disinvestment targets and shore up its finances.

After the meeting of the empowered group of ministers (EGom), Petroleum and Natural Gas Minister Veerappa Moily said the ministerial panel had decided to go for a block deal on the bourses and the modalities for the transaction would soon be worked out.

Petroleum secretary Vivek Rae said with the transaction is likely to be finalised in ''the next week or so''. He added that the government, which has a 79-per cent stake in IOC, expects to garner up to Rs5,000 crore from the deal.

The government hoped to raise Rs40,000 crore this fiscal year by divesting bits of its stake in public sector companies, but so far it has only raised around Rs3,705 crore through this route. Official statements attribute this to a poor investment climate, but independent experts agree it is more because serious private investors are chary of companies run by the Indian government.

The slowing economy and rising subsidies on food and fuels have pushed the government into a corner, with the fiscal deficit for the April-November period rising to $82.3 billion, or nearly 94 per cent of the full-year target.

ONGC chairman Sudhir Vasudeva said the 10-per cent IOC stake will most likely be split equally between ONGC and OIL. ONGC already holds 8.77 per cent stake in IOC.

''The 5 per cent stake will cost us Rs2,200-2,300 crore, Vasudeva said, but added that this amount would not have ''any bearing on our capital expenditure plans''.

OIL has a cash reserve of about Rs8,000 crore. ''We feel that shares of IOC are grossly under-priced. Normally, we would not want to do a block deal but we thought we should follow this route which would enable revenues to be raised,'' Rae said.

The EGoM decided to sell 242.7 million shares in the company.

While the divestment is slated for the next week, it is not yet decided as to how much share each company will take.

This would have a negative impact on the balance sheets of ONGC and Oil India, which is already bearing part of the government's oil subsidy burden.

The decision, however, will help end a row between petroleum ministry and finance ministry. Petroleum minister M Veerappa Moily had raised objections over the sale of IOC shares ''at a throw-away price.''

''We have decided to go for a block deal. Modalities would be decided later,'' Moily said.

''This is not a strategic buy, but of course not a bad buy. About 5 per cent stake in IOC would cost us about Rs2,200 crore and without any lock-in period. Hence, this would not have any impact on our capital expenditure plans,'' said A K Banerjee, director-finance, ONGC.

 ''After the stake buy, we will be left with around Rs2,800 crore of reserves for the next financial year. We have a capex plan of Rs36,000 crore for the next financial year. Out of this, internal generation is expected to be in the range of Rs32,000 crore, which means the deficit may be in the range of Rs4,000 crore,'' he added.

OIL is sitting on a cash pile of Rs8,000 crore while, IOC's cash reserves are lower at around Rs6,000 crore.

IOC shares, according to petroleum secretary Vivek Rae, are under-priced now, but for realising the right price, block deal is not a preferable route. However, the government is under fiscal pressure and needs to take steps to raise about Rs4,800-5,000 crore, he said.

''The company board would meet soon and pass a resolution soon,'' he added. 

IOC's scrips closed 1.48 per cent up at Rs212.05 on Bombay Stock Exchange, while ONGC shares were down 1.48 per cent at Rs287 and OIL closed 0.55 per cent down at Rs477.40.

Government holds 78.92 per cent in IOC and a 10 per cent divestment will leave the government with 68.92 per cent stake in the oil marketing company.

Divestment of IOC stake, first planned on 9 January 2013, had to be deferred due to a drop in share prices. However, the finance ministry has been pushing for it, in order to meet its divestment target of Rs40,000 crore for the current financial year. 

Early this month, the EGoM had to dump the plans to go to the markets to raise the money and opted for a bulk deal.

While ONGC and OIL may find enough resources for the stake acquisition, both companies would find themselves hamstrung in business-related acquisitions and funding of investments in producing assets.