The government is likely to adopt the holding company mechanism as it moves ahead with its proposal to dilute its 51.11 per cent stake in Hindustan Petroleum Corporation Ltd (HPCL) in favour of ONGC. The holding company mechanism would mean HPCL will become a subsidiary of ONGC while retaining its identity. So, how is this different from disinvestment?

The Centre does not want this to be seen as a revenue-raising exercise. In this case, the government, the majority stakeholder in HPCL, will sell its shares to ONGC, another public sector entity. The stake will not be diluted in the market.

Besides, if the government opted for the disinvestment route, there are chances of it losing management control, a source said, adding that “it may not want to do this in such a strategic sector.”

The holding company approach was first proposed in 2005 by a committee headed by V Krishnamurthy. The committee, while concluding that the merger of oil PSUs may not be an advisable option, had suggested two alternatives, namely, creation of a holding company or a coordination body.

‘Not disinvestment’

“Technically, the ONGC-HPCL proposal is not a disinvestment. This is a consolidation effort in the petroleum sector. It is an attempt to create an integrated energy major, where the resources and strengths of ONGC’s exploration and production capabilities and HPCL’s refining and retailing capabilities will come under one umbrella,” a senior official in the know said, adding that “this was common in the private sector.”

Minister of State (Independent Charge) for Petroleum and Natural Gas Dharmendra Pradhan has been maintaining that HPCL will not lose its identity. This would also not raise human resource issues.

Asked if this would attract Takeover Code norms and whether ONGC would have to give a control premium (pay for buying the shares), experts said that if the government wants it can seek exemption from capital market regulator SEBI. Today, the consideration for a buyout is based on the one-year, 60-day, or 26-week stock prices.

The nodal ministry and the Finance Ministry’s Department of Investment and Public Asset Management are working on the Cabinet note, which is in the final stages. “The Cabinet’s nod is being sought for a broad structure indicating the intent of transferring shares in favour of ONGC. The commercial details will be worked on subsequently,” an official said.

ONGC has not started work on the stake buyout. DK Sarraf, CMD, told BusinessLine : “Only when the proposal comes to us will the process start. Nothing has come as yet.” The transaction will require the ONGC board’s approval.

Pavan Kumar Vijay, MD, Corporate Professionals Capital, a SEBI-registered merchant banker specialising in capital market transactions, mergers and acquisitions, said: “Going by what I read this will be a new type of consolidation, where it will be a consolidated balance sheet without the companies losing their identity.”