ONGC-HPCL merger: Cabinet likely to take up proposal this month, deal may happen this fiscal

The Cabinet is likely to consider this month the sale of the government's 51 percent stake in Hindustan Petroleum Corp Ltd (HPCL) to Oil and Natural Gas Corp (ONGC) for over Rs 26,000 crore.

The Department of Investment and Public Asset Management (DIPAM) in the Ministry of Finance is moving a note for consideration of the Cabinet for divesting government's entire 51.11 percent shareholding in India's third-biggest fuel retailer HPCL to oil producer ONGC.

The Cabinet may take up the proposal this month, a source in the government said. "It may come before the Cabinet as early as 10 to 15 days," he said.



After the Cabinet nod, the government will move to appoint valuation and transaction advisers while ONGC too may decide to hire merchant bankers to arrive at the valuation of government shareholding.

Following up on finance minister Arun Jaitley's Budget announcement of creating an integrated oil company, ONGC evaluated options of acquiring either HPCL or Bharat Petroleum Corp Ltd (BPCL) - the two downstream oil refining and fuel marketing companies.

While acquiring either one of them made a lot of business sense, ONGC found the nation's second-biggest fuel retailer BPCL too expensive.

It then conveyed its choice to the parent oil ministry, which relayed it to DIPAM.

After a few rounds of inter-ministerial consultations, DIPAM is now approaching the Cabinet for a nod for the transaction, the source said, adding the transaction is likely to be completed within this fiscal year.

ONGC has a cash reserve of Rs 13,014 crore and to fund the government stake acquisition in HPCL, it will have to borrow at least Rs 10,000 crore, the source said.

BPCL has a market cap of Rs 95,447.12 crore and buying government's 54.93 per cent would alone have entailed an outgo of Rs 52,430 crore.

HPCL on the other hand has a market cap of Rs 51,764.25 and buying government's entire 51.11 percent stake would entail an outgo of Rs 26,450 crore. Another Rs 13,450 crore or so would be required in case open offer for an additional 26 percent has to be made.

Sources said while initially the government was looking at creating an integrated oil company through merger of an oil producer with a refiner, the idea was dropped for the fear of not repeating the Air India-Indian Airlines kind of merger.

Similar differences in work culture and ethos prevail in upstream and downstream firms and so the exercise under consideration now is to only help government mop up resources and HPCL would become a mere subsidiary of ONGC.

ONGC already has a refining subsidiary in Mangalore Refinery and Petrochemcials Ltd (MPRL).

There are only six major companies in the oil sector - ONGC and Oil India Ltd being the oil producers, Indian Oil Corp (IOC), HPCL and BPCL in refinery business and GAIL in midstream gas transportation business.

The rest such as ONGC Videsh, Chennai Petroleum Corp (CPCL), Numaligarh Refinery Ltd and MRPL are already subsidiaries of one of these six PSUs.

Sources said the options were very limited and ONGC chose HPCL over BPCL.

HPCL will add 23.8 million tonnes of annual oil refining capacity to ONGC's portfolio, making it the third-largest refiner in the country after IOC and Reliance Industries.

ONGC already is majority owner of MRPL, which has a 15- million tonnes refinery.

Updated Date: Jul 07, 2017 11:10 AM

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