Is ONGC’s acquisition of promoter stake in Hindustan Petroleum Corporation a strategic sale or a disinvestment? The Finance Ministry terms it a strategic sale, while the Ministry for Petroleum & Natural Gas has called it innovative vertical integration.

Experts are divided on whether it is a case of disinvestment by the government or if it is just a vertical integration. While the discussions continue, the deal, according to those associated with it, appears to have ensured the government will not miss its divestment and fiscal deficit targets.

Former Finance Minister P Chidambaram, in his tweets, pointed out that though the government has lowered its borrowing, ONGC will borrow an equal amount to pay the Centre for HPCL shares. “It has the same effect,” he had said.

Balancing the fiscal deficit had become tougher for the government after a ₹50,000-crore additional borrowing announced in December last year. This had raised concerns that the government may breach its 3.2 per cent fiscal deficit target.

A few weeks later, the additional borrowing was lowered by ₹30,000 crore, and when the near-₹37,000 crore deal was announced, it was labelled a strategic sale.

Interestingly, the government appears to have transferred the borrowing liabilities so that it will not show on the government’s books, cleaning up the sheet to meet the fiscal deficit targets.

“ONGC’s borrowings to fund the deal will be like an off-budget liability for the government. It will reflect in the outstanding liability of the government, but will not be in the fiscal deficit calculations,” said NR Bhanumurthy, Professor, National Institute of Public Finance and Policy.

“ONGC will either borrow or fund or use a mix of both to pay the government this money. Thus, the borrowing is off-Budget through the CPSE while there is revenue accrued to government under the divestment head. This is legitimate when the government wants to retain stakes in profitable public sector enterprises as well as allow them to have a larger scale of operation,” said Ranen Banerjee, Partner and Leader (Public Finance and Economics), PwC India.

But other experts argue that the stake-buy does not fall under the traditional definition of disinvestment or strategic sale.

This is because the government will continue to have control over HPCL despite selling its entire stake to ONGC. If considered as a case of disinvestment, the stake sale will take up the total proceeds from disinvestment in state-owned firms to over ₹92,000 crore this fiscal, giving much relief to the Centre, which is reviewing its balance sheet ahead of the Union Budget.

Critics also argue that it’s not a divestment per se unless an open offer is called by the government.

One-time capital receipts

“The government is selling its shares in HPCL to ONGC. It is not like a regular disinvestment; these receipts are technically one-time capital receipts. So, it is difficult to argue that it is not disinvestment money,” noted an official.

This is seconded by K Ravichandran, Senior Vice-President, ICRA Ltd. He said, “I would call it a disinvestment; whether or not to call an open offer is a technical issue. The government had taken an exemption from SEBI for not calling an open offer and we must respect the regulator’s order.”

“From the government’s point of view, it does not matter whether the money comes from ONGC or from any other private company. It’s like killing two birds with one stone by not letting go of a profit-making company and collecting revenues too,” he added.