Decks cleared for the creation of an ‘oil giant’

Paving the way for the creation of an integrated ‘oil giant’ that will match international companies in size and clout, the Cabinet Committee on Economic Affairs on Wednesday gave in-principle approval to the to the sale of the government’s 51.11 per cent stake in Hindustan Petroleum Corporation Ltd (HPCL) to ONGC.

As with the Air India disinvestment, it has decided to constitute an Alternative Mechanism for a smooth transition of the stake from one promoter to another.

A ministerial panel, comprising Finance Minister Arun Jaitley, Petroleum & Natural Gas Minister Dharmendra Pradhan, and Road Transport & Highways and Shipping Nitin Gadkari will oversee the process.

HPCL has a market capitalisation of ₹58,485.55 crore, based on Wednesday’s closing price of ₹384 a share on the BSE.

At this rate, ONGC will have to shell out close to ₹30,000 crore for the government’s 51.11 per cent stake but the actual price may be based on the 1-year, 26-week or 60-day average price.

HPCL to retain identity Speaking to BusinessLine, DK Sarraf, Chairman and Managing Director of ONGC, said he believed the transition would be smooth. The deal is expected to be concluded this fiscal year.

Under the proposal, the Central 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.

ONGC will be a holding company, and HPCL will become its subsidiary, while retaining its identity. The Centre does not want this to be seen as a revenue raising exercise.

“The government has taken a decision; based on the decision and the timeline they want to follow, we will move forward. HPCL will retain its own identity,” Sarraf said.

He added that “HPCL has got a strong brand and a strong management team. We cannot disrupt the team.”

On the issue of a management change, since ONGC will become a majority stakeholder, an official in the know said: “Even if there is any change it will not be major. The boards are decided by the government. We have to see what the government as the owner has in mind.”

Sarraf believes that the deal will not trigger Takeover Code norms.

The Finance Minister, in his Budget speech early this year, said: “We see opportunities to strengthen our CPSEs through consolidation, mergers and acquisitions. By these methods, the CPSEs can be integrated across the value chain of an industry. It will give them capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for stakeholders. Possibilities of such restructuring are visible in the oil and gas sector.

“We propose to create an integrated public sector ‘oil major’ which will be able to match the performance of international and domestic private sector oil and gas companies.”

The move is an attempt at consolidation in the petroleum sector. It is aimed at creating an integrated energy major, combining ONGC’s exploration and production capabilities with HPCL’s refining and retailing strengths under one umbrella.

Shares rise HPCL shares closed 4.14 per cent higher, at ₹384 apiece, on the Bombay Stock Exchange on Wednesday.

ONGC’s shares, too, rose 1.30 per cent and closed at ₹163.05. The government’s stake in ONGC stands at 68.07 per cent.

The concept of the holding company was first proposed in 2005 by a committee headed by V Krishnamurthy. Experts believe that the holding company concept may work out better as it will result in optimisation of resource sharing and cost savings.

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