By Aman Shah
The Indian multinational Oil and Natural Gas Company (ONGC), headquartered in Dehradun, is preparing to acquire the Hindustan Petroleum Corporation (HPCL), which is another state-owned company, headquartered in Mumbai. The union of these giants in Indias oil and gas sector would create an enormous behemoth. According to the almost done deal, ONGC will pay Rs 36,915 crore to the government in order to buy its 51.1% stake in HPCL. This payment would represent 114% of the company’s Friday closing price. ONGC is expected to pay the whole amount in cash by end of the month.
How has this deal come about?
ONGC first expressed its interest in acquiring HPCL to the government last year. The proposal was in line with the government’s aim of selling off various Public Sector Units (PSUs). The Ministry of Petroleum and Natural Gas gave its nod to the sale on July 19, 2017. Mergers and acquisitions of publicly traded companies are overseen by the Securities and Exchange Board of India (SEBI). Under the SEBIs takeover regulations, an entity buying a 25% stake in a publicly listed firm must make an offer to buy an additional 26% from its public shareholders. However, as this deal is a transaction between the government and a government-owned company, it is exempted from the rule.
ONGC, which currently has cash reserves of only Rs 12,000 crore, will have to resort to short-term borrowing in order to fund the acquisition deal. The company has already obtained approval from its board for raising its borrowing limit from Rs 25,000 crore to Rs 35,000 crore. The deal does not require any further regulatory approval from government bodies. Thus, it is expected to be completed by end of the month. The government is in hurry to complete the transaction before the fiscal year ends in 10 weeks.
The ONGC’s current $65 billion in assets will increase by the acquisition of HPCLs $11 billion assets to $76 billion. However, this will still leave the company behind Reliance Industries $110 billion worth of assets. Also, it is not expected to beat RILs $73.1 billion annual revenue, with the joint revenue of the merged company expected to reach only $62 billion. However, the enlarged company is expected to jump 20 positions in the ranking of companies in the sector by revenue, which would put the company at the 31st position in the world.
How will the government benefit?
There are two advantages of the deal for the government. In 1991, the Government of India, then plagued by inefficient and an impotent public sector, decided to disinvest from its Public Sector Units. This ushered in an era of economic privatisation and liberalisation in the country. The government set this years disinvestment target at Rs 72,500 crores in the budget delivered by Finance Minister Arun Jaitley on the 1st of February 2017. As of the 11th of January 2018, the governments proceeds from disinvestment stood at Rs 54,337 crores. If this latest transaction is completed during the current fiscal year, the government will surpass its target with a profit from disinvestments of around Rs 91,000 crores for the year 2017-18.
This profit would lead to the second advantage which would be a reduction in Indias fiscal deficit. Each year the Union Government decides on a target fiscal deficit. It tries to keep the deficit as low as possible by increasing its total revenues and decreasing its expenditures. This years fiscal deficit target was fixed by Minister Jaitley’s budget at 3.2% of GDP. However, according to the Controller General of Accounts, Indias fiscal deficit has already grown to 115% of the specified target as of November 2017.
Indias fiscal deficit has been increasing at a high pace due to a decrease in revenues following the implementation of the Goods and Services Tax. The deal between ONGC and HPCL would allow the government to stick to its target deficit. Taking these two perks of the mega-merger deal into consideration, it is hard to find any demerit in it. This is a win-win situation for the Indian taxpayer.
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