ONGC, OIL to rescue Govt. thru IOC

IOC is up 4.1% at Rs. 221 per share, while ONGC is marginally in the green at 291 (up 1.5%) while Oil India is flat at 474 (down 0.70%). EGoM has given an ‘in-principle’ approval to the sale of 10% stake or 24.27 crore shares in IOC to upstream companies ONGC and Oil India, through the block deal route on the stock exchanges, in lieu of the Petroleum Ministry-suggested auction method (offer for sale through stock exchanges). The shares will be purchased in a week’s time at a 1% discount to the previous day’s closing price, but exact date and price is yet to be announced.

This cross-holding route will enable the Government garner Rs. 5,340 crore (based on price of Rs. 220 per share) and part-meet its FY14 divestment target of Rs 40,000 crore, without participation from institutional or retail investors. This is an alternate to divestment as IOC shares are ruling at steep discount to its 52 week high price of Rs. 375 per share. Post the deal, Government holding in IOC will come down to 68.92% from present 78.92%.

The proportion which each of the companies will acquire is to be decided, but it may be split 50:50 between ONGC and Oil India or 30:70, as ONGC already holds 8.77% stake in IOC and Oil India is currently not an IOC shareholder. Both these cash rich companies had cash reserves of Rs. 19,500 crore and Rs. 12,500 crore, as of 30th September 2013, respectively. Hence, ability to purchase is not a concern. Currently, besides ONGC holding 8.77% in IOC, IOC also owns 7.69% in ONGC.