• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Raghuvir Srinivasan

Will divestment and sale of crossholdings in ONGC, Indian Oil and Gail alter the price discovery process?

INVESTORS high on oil sector stocks need to closely monitor the fall out of the two government decisions last week. The first one is the permission to Oil and Natural Gas Corporation (ONGC), Gail and Indian Oil to sell the shares that they hold in each other. Second is the decision to disinvest 10 per cent of government holdings in ONGC and Gail. Both these decisions have important implications for the valuation of these stocks.

ONGC, Indian Oil and Gail are scaling new heights in valuation and one factor driving this apart from fundamentals is a low floating stock in the market. For all its distinction as the leading stock by market capitalisation (in excess of Rs 1,00,000 crore), the free-float in ONGC is a piffling 3.7 per cent only and this includes shares held by mutual funds and financial institutions. The public hold a miniscule 1.21 per cent or 1.72 crore shares only with the average daily trading volume being around 2-5 lakh shares.

Indian Oil's case is only marginally better with a free-float of 8.45 per cent, more than half of which is held by institutions which do not buy and sell every day. The company made a bonus offer in October specifically to increase the floating stock. Gail's position is also similar with the public holding just 1.89 per cent of its equity or 1.6 crore shares.

The lack of adequate liquidity is built into the pricing of these stocks through simple demand-supply economics. In other words, the price discovery process for these three stocks is unsatisfactory at the moment relative to other stocks with higher free float. However, this situation will change dramatically in the near future. The disinvestment in ONGC, which appears a certainty before the end of this fiscal, will push 14.25 crore shares into the market. This is about three times the existing floating stock.

The impact on liquidity will be tremendous especially if a major portion of the disinvested shares is sold to retail investors, as it is most likely to be. Almost an equal number of shares will enter the system when Indian Oil sells its 9.6 per cent holding in ONGC. Ditto in the case of Gail where 8.45 crore shares will join the market which already has 10.13 crore shares floating. It will be a similar story in the case of Indian Oil as well.

The impact of such sudden liquidity on the prices needs to be watched carefully. Chances are that these stocks may lose a part of the sheen that they acquired due to a low floating stock. But again, the increased liquidity will also help investors to enter and exit the stock more easily than is the case now.

Investors will now be able to partake more freely in the growth story of these three major oil companies. A disinvestment done through the book-building route will also offer investors the opportunity to acquire these shares in a fair and transparent manner. The icing on the cake will, of course, be an attractive pricing of these shares by the government. While that is uncertain, what is certain is that investors in these stocks need to closely watch how things play out in the next three months.

Article E-Mail :: Comment :: Syndication

Stories in this Section
NSDL: Non-cash corporate actions

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line