Govt is about to screw ONGC's minority shareholders - again

India’s primary oil producer, the Oil & Natural Gas Corporation (ONGC), is about to get it in the neck once again. According to news reports, the government is planning to increase the company’s subsidy burden in order to avoid taking a more direct hit on budgetary finances.

Under the formula worked out earlier, ONGC and other oil and gas producers (Gas Authority of India Ltd and Oil India Ltd) have to offer “discounts” (i.e. subsidies) to oil marketing companies (Indian Oil, BPCL and HPCL) up to 33.3 percent of their losses on diesel, cooking gas and kerosene sales. Now, the government apparently wants to raise the subsidy amount to Rs 30,000 crore this year, which works out to 38.5 percent, though there is no official confirmation of this move.

[caption id=“attachment_11695” align=“alignleft” width=“380” caption=“Can ONGC afford to offer more subsidies? Amit Dave/Reuters”]  [/caption]

While the ONGC share is obviously tanking on this news, the move raises serious concerns about corporate governance at ONGC. The government wears two hats when it comes to ONGC. As a policymaker, it can direct ONGC to subsidise whomsoever it wants to in public interest. But ONGC is not fully owned by the government: 26 percent of its shareholders are ordinary and institutional investors, whose interests cannot be sacrificed at the whims of the majority shareholder. The same holds for GAIL and OIL, both of which are publicly-listed companies.

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It is ironic that a government which, as a regulator, is supposed to enforce high standards of corporate governance falls woefully short when it comes to managing its own companies. The first voice against corporate misgovernance at ONGC was raised two years ago in a Goldman Sachs report.

“Since 2003-04, the promoter (government, which owns a 74 percent stake) has taken away cash from the company on a quarterly basis for subsidising loss-making state-owned downstream companies. So far ONGC’s promoters have taken cash of almost $ 20 billion (about Rs 90,000 crore at current rupee-dollar exchange rates) from the company without consulting the minority shareholders,” Goldman said in a report in March, 2009. The stolen amounts, if anything, must by now have swelled to more than twice that figure.

“Issues with corporate governance at ONGC are among the more serious for companies in our coverage universe,” Goldman Sachs analysts Nilesh Banerjee, Karthik Bhat and Durga Dath wrote then. “We believe minority shareholders are likely to suffer in a situation where their interests are poorly protected.” Firstpost agrees with them.

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But the government struck back ferociously, and claimed no corporate governance issue was involved. “The government is the majority shareholder in ONGC and in every company, the majority shareholder decides,” RS Pandey, the senior-most bureaucrat in the nation’s Oil Ministry, had told Bloomberg at that time. “It is not illegal.”

But illegality is not the issue here, only governance ethics. Two things stand out. First, in any well-governed company, when directors vote on issues in which they have a personal stake (such as their own salaries, or award of preferential shares), they let the independent directors take a call. In this case, the government’s decision to force ONGC to subsidise oil consumers is about pandering to voter psychology and not pure public policy. Else, a Reliance Industries could also have been asked to subsidise diesel, cooking gas and kerosene consumers. But government has not done so, and, in the ultimate analysis, it has damaged the interests of its own minority shareholders.

The second issue relates to transparency in decision-making. If, in fact, the government is planning to raise the subsidy burden to be borne by ONGC, it needs to announce that publicly. If not, it needs to scotch the rumour instantly. By ignoring selective news leaks about listed public sector companies, the government is, in fact, facilitating insider trading.

When the media carry speculative, price-sensitive stories about private companies, the stock exchanges ask them to clarify immediately about the veracity of these reports. Why shouldn’t the same logic apply to government-owned companies?

The final point is this: if government plans to use ONGC and other oil and gas producers to subsidise the oil marketing companies, it has a right to do so. In this case, it should buy back the outstanding shares of the oil companies. That will end all finger-pointing about corporate governance.