Who's the sucker now? LIC loses Rs 1,200 cr in ONGC fiasco

Life Insurance Corporation(LIC ) really is a life saver, at least for the government of India as it truly came to the rescue of the government at the very last minute. For proof, consider how it salvaged the government’s hurriedly organised 5 percent stake sale in state-run oil producer ONGC.

Just minutes before the stake sale closed, LIC stepped in an acquired as much as 4.408 percent of ONGC.

LIC bought 37.7 crore shares of ONGC at Rs 303.67 per share , which totals about Rs 11,450 crore. Given that the oil giant’s shares slipped 5 percent since the Union Budget was announced on 16 March, that investment is now worth Rs 10,216 crore, down by nearly Rs 1,200 crore.

In the Budget, Finance Minister Pranab Mukherjee announced a hike in the cess on crude and petroleum oil to Rs 4,500 per tonne from Rs 2,500 per tonne.

According to this Firstpost story, the cess imposes an extra cost on all oil-producing companies like ONGC, Cairn India, Reliance, etc. Sudhir Vasudeva, chairman and managing director, ONGC, told CNBC TV18 that the budgetary measures would impact the company by Rs 5,500 crore at the profit before tax level.

Clearly, this led to a fall in the stock’s price - and consequently, a reduction in the value of shares that LIC bought in the stake sale. While ONGC - and the government- may have been spared the blushes, clearly, there seems to be no such to protect the investments of the thousands of individuals who invested in LIC’s insurance premiums, which was used to hoover up ONGC’s shares.

Based on this news, Bank of America Merril Lynch has cut its outlook on ONGC to ’neutral’ with a price target of Rs298 per share. (The brokerage firm had a buy rating on the stock earlier). “We downgrade ONGC to neutral given the hit from rise in cess and also as hope of reforms are fading after the recent state election results”. it said in its recent report.

The government sold a 5 percent stake in ONGC because it wanted to raise some more money to meet its disinvestment target of Rs 40,000 crore for the financial year ending March 2012 (the ONGC stake sale raised that amount to Rs13,895 crore).

Now, we’ll have to see what new tricks the government comes up with to ensure it meets its new disinvestment target of Rs 30,000 crore for the next financial year (see chart).