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ONGC is funding the HPCL acquisition from about Rs12,000 crore cash it has and short- term borrowing. Photo: Hindustan Times
ONGC is funding the HPCL acquisition from about Rs12,000 crore cash it has and short- term borrowing. Photo: Hindustan Times

ONGC gets govt nod to sell stake in IOC, GAIL to fund HPCL buy

ONGC holds a 13.77% stake in IOCwhich at Tuesday's trading price is worth over Rs26,200 croreand a 4.86% stake in GAIL, which is worth over Rs3,847 crore

New Delhi: State-owned Oil and Natural Gas Corp. Ltd (ONGC) has received approval from the government to sell its stake in Indian Oil Corp. Ltd (IOC) and GAIL India Ltd to help fund the Rs36,915 crore acquisition of Hindustan Petroleum Corp. Ltd (HPCL).

ONGC holds a 13.77% stake in nation’s biggest refiner IOC, which at Tuesday’s trading price is worth over Rs26,200 crore. It also holds 4.86% stake in gas utility GAIL, which is worth over Rs3,847 crore.

Top sources with direct knowledge of the issue said the government gave ONGC nod to sell its shareholding in IOC and GAIL earlier this month but the company is waiting for the right price to offload the shares.

Currently, ONGC is funding the acquisition of government’s 51.11% stake in oil refining and marketing firm HPCL from the about Rs12,000 crore cash it has and short- term borrowing. Sources said ONGC is a zero-debt company and wants to retain that status.

The short-term loan it is availing have provision to pre-pay without any penalty. It plans to pre-pay the one-year tenure loan it is taking for HPCL buy by selling IOC and GAIL shares in due course, they said.

Sources said ONGC had held talks with Life Insurance Corp. of India (LIC) for selling IOC and GAIL shares but the state- owned insurer insisted on buying them at 10% discount to the prevailing price. So, ONGC has decided to offload the shares in open market.

ONGC’s purchase of HPCL would create India’s first integrated oil company. This would be ONGC’s biggest acquisition and second buyout this fiscal after its Rs7,738 crore acquisition of 80% stake in Gujarat State Petroleum Corp.’s KG basin gas block.

ONGC chairman and managing director Shashi Shanker had on Sunday stated that the company’s board has approved raising of the borrowing limit from Rs25,000 crore to Rs35,000 crore. This will be the company’s first ever debt.

“We will use our (Rs12,000-13,000 crore) cash first and then the liquid assets and debt will be last," Shanker had said. “This order can change, because we won’t sell the liquid assets in distress. Also, we have offers for over Rs50,000 crore debt at very competitive rates, both foreign currency and local."

Shanker had said the company paid less than the acquisition price recommended by the company’s valuation adviser, Ernst and Young (EY). He, however, refused to share details.

The Rs473.97 per share ONGC is paying to the government is 14% higher than Friday’s closing price of HPCL and over 10% of the 60-day weighted average of the HPCL scrip. Sources said while the government was seeking as much as Rs69,000 crore for selling controlling stake in HPCL, EY had put HPCL’s valuation at Rs475 a share plus a premium for getting the controlling stake. The outside advice the company took from Citi put the price at Rs500 per share.

The stake sale will help the government cross its sell- off target for the first time and would help stick to the fiscal deficit target of 3.2% of gross domestic product. The government had set a target of Rs72,500 crore from disinvestment proceeds this fiscal. Before the ONGC-HPCL deal, it had collected Rs54,337.60 crore.

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

At 2.03pm, ONGC shares traded 3.75% up at Rs207.45 on BSE, whereas HPCL shares fell 1.47% to Rs395.85. The Sensex was up 0.86% at 36,104.42 points.

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