LIC's 4.4% buy in ONGC highlights govt's weak policies

The failed ONGC auction is telling of the government’s weak finances and weak policies and is also credit negative for the government, said credit rating agency Moody’s in its weekly credit outlook today.

ONGC today said LIC picked up 37.71 crore shares in the company during the auction last week and its total holding has gone up to 9.48 percent. At an average price of Rs 303.67 a share, that makes an investment of around Rs 11,450 crore.

[caption id=“attachment_234471” align=“alignleft” width=“380” caption=“While the ONGC auction was subscribed by 98.3 percent, LIC has picked up over 84 percent of the shares on offer. The remaining was bought by institutional and retail investors. Reuters”]  [/caption]

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While the ONGC auction was subscribed by 98.3 percent, LIC has picked up over 84 percent of the shares on offer. The remaining was bought by institutional and retail investors. With the acquisition of 4.41 percent, LIC’s stake in ONGC has gone up to 9.48 percent.. As per the Insurance regulator IRDA guidelines, an insurance firm’s holding should not exceed 10 percent in any company.

What this means is that out of 5 percent on offer, only 0.6 percent was subscribed by institutional players. Moody’s said such poor private interest and participation is negative for a government which was pinning its hope on divestment to bring down its huge fiscal deficit of Rs 4,20,000 crore.

The note said that the markets have soared by a decent 12 percent since the beginning of 2012 and raised hopes of the government bridging its fiscal deficit gap through stake sales. But the auction shows how the government policies “tarnish the perceived value of the companies it owns.”

The crucial criticism was that the ONGC share priced at Rs 290 was more expensive that the market value at that time. And there is always a fear about the government’s energy subsidy policy and deployment of its own cash balance to shore up government finances.

In India, certain fuels are sold at subsidised rates and a part of the subsidy is borne by upstream energy companies like ONGC. If the government wants to fix its deficit problems, it might ask the oil companies to bear larger portions of the subsidy, Moody’s said. It expects ONGC’s share of the subsidy burden to reach an all time high of Rs 46,000 crore ($9.2 billion) in fiscal 2011.

What is also worrying is ONGC’s large cash balance of Rs 27,400 crore which could used to dole out higher dividends to the government, its majority owner. ONGC has already paid out Rs 5,300 crore as interim dividend in January.

The government is now also thinking of asking cash-rich public sector companies to buy government stake in other PSUs to rake in more moolah for government. The note says, “This would transfer cash to the government and increase cross-ownership of public enterprises. However, this strategy departs from the original aim of disinvestment, which was to garner revenue from the private sector.”

However, Disinvestment Secretary Haleem Khan told PTI, “I am perfectly comfortable with 98 percent subscription and in term of FPOs which were scheduled we got much more than that.” The low orders till even ten minutes before the closing of the auction was blamed on technical glitches though the exchanges in a joint note declined any glitches on their part.