The Cabinet on Wednesday gave in-principle approval for the sale of government’s 51.1 per cent stake in oil marketing major HPCL to ONGC. With government waiving the need for ONGC to make an open offer, analysts peg the size of the deal at around `28,000 crore.
The decision will see ONGC take over control of the Oil Marketing Company (OMC) but will run it as a subsidiary, retaining the HPCL brand. The deal is expected to be completed within a year and HPCL will add 23.8 million tonnes of annual oil refining capacity to ONGC’s portfolio, making it India’s third-largest refiner.
While the government’s decision to waive the open offer condition for ONGC was expected, analysts say such an offer would have increased the deal size by close to `15,000 crore. In its current form, the deal will help the government achieve close to 40 per cent of its divestment target of `72,500 crore for this financial year.
As per market norms, companies are required to acquire an additional 26 per cent from the market. However, during government stake sale, SEBI laws allow avoidance of open offer if ultimate ownership remains same and premium paid is less than 25 per cent.
While share prices of both HPCl and ONGC rose after the news broke on Wednesday that the proposal for the deal was up for consideration before the Cabinet, many market experts have pointed out that the deal only helps the government keep control.
In the run-up to the decision, analysts Ritesh Gupta and Gaurav Khandelwal from Ambit Capital wrote: “ONGC parentage could mean interference (from ONGC or government), highly probable participation in upstream and, more importantly, dilution of a high-performance culture.”
They went on to add that long term shareholders of HPCL should actually be concerned, since ONGC “doesn’t have such a good track record on capital allocation.” Brokerage firm CLSA also pointed out that government was the only gainer in the deal.
The government has been clear about its intentions to divest and consolidate. Finance Minister Arun Jaitley had pointed that out while presenting the Budget.