An Empowered Group of Ministers (EGoM) on Thursday approved sale of 10% government stake in IOC through block deals to ONGC and Oil India (OIL), in line with the trend to lean on state-backed firms for meeting its disinvestment target for the fiscal. Only, LIC has been spared this time round.
The stake sale, which is likely to happen within a week, can fetch the government Rs 4,800-5,000 crore. The government owns a 79% stake in IOC. Oil minister M Veerappa Moily said that an in-principle decision for a block deal was taken and modalities will be worked out soon.
The government had been aggressively pushing the stake sale of IOC since the last two months, to meet its PSU stake sale target of Rs 40,000 crore.
However, it did not find enough interest among the investor community as oil marketing companies or OMCs have been making huge revenue losses. IOC is expected to make a revenue loss Rs 74,700 crore this fiscal due to sale of subsidised diesel, LPG and kerosene.
Experts believe the decision is negative for upstream companies that are already under the subsidy burden. “It is not a strategic investment for ONGC and OIL. Both companies are part of the subsidy burden. Besides, their domestic production has also been disrupted. Also, both companies desperately require funds to acquire assets. Till 1HFY14, ONGC has net cash of Rs 19,500 crore and Oil India has Rs 11,600 crore. Hence, the utilisation of fund in the non-core business does not seem be a prudent step for the companies,” said Dhaval Joshi, an analyst with Emkay Global Financial Services.
ONGC already holds an 8.77% stake in IOC. Its chairman Sudhir Vasudeva told a TV channel that buying a stake in IOC would not impact the company’s expansion plans. He expects 10% stake to be split equally between ONGC and OIL. Thus, the 5% stake is likely to cost around Rs 2,200-2,300 crore.
He stressed that ONGC had agreed to buy the IOC stake on a condition that there will be no lock-in period for selling the shares to be bought.
“Whenever we want, we can sell this stake and raise money,” he said.
However, SP Tulsian of sptulsian.com said ‘the no lock-in period’ buzz needs to be taken with a pinch of salt. ONGC, he said, has been holding a stake in IOC since the last 14 years, but has not been able to exit the stock. “What has prevented them?”
The government has been trying to sell its stake in OMCs since the last 2-3 years, but every time it announced its intentions, stock prices start to correct. “ONGC is cash-negative on consolidated basis. This decision would push them to keep borrowing to meet the requirements of their new investments,” said Tulsian. Meeting the disinvestment target via dividend payment, as in the case of Coal India, was l a relatively dignified way, he said.
He expects OIL to bear a larger portion of the IOC stake buy as it does not have as big an asset investment plan as ONGC’s. The finance ministry, he said, appears to be determined to meet its fiscal deficit end of 4.8%, caring little about the means.