ONGC’s slippery auction sale

In the first auction of a state-owned firm’s shares, ONGC met with a cold response from investors before state-run LIC intervened to save the issue. Here’s a look at what went wrong. Anupama Airy reports.

In the first auction of a state-owned firm’s shares, ONGC met with a cold response from investors before state-run LIC intervened to save the issue. Here’s a look at what went wrong.

What went wrong with the ONGC auction process?

Market analysts blamed the dull performance on the floor price of Rs 290 a share, set by the government. Markets were of the view that the floor price should have been priced at a discount to ensure success. The auction process was also used for the first time. Under it, sale of shares is done on price priority basis, meaning the bidders at highest price would be allotted shares.

What was the result of the auction?

The auction received a total of 3,982 bids for over 54 crore shares. However, 1,219 bids for about 12 crore were cancelled due to various reasons, including insufficient funds. In all, there were 2,763 valid bids for 42.04 crore ONGC shares. The government had planned to sell 44.77 crore shares.

What led to LIC’s intervention?

The lacklustre start to the one-day auction process made LIC step in. LIC picked up 40 crore shares, or 95%, of ONGC shares on offer.

What is LIC’s stake in ONGC after the auction?

As of October-December quarter of 2011-12, LIC had 3.23% stake in the ONGC. With the fresh equity, total holding of the insurer has gone up to above 8%. It is still less than the 10% investment cap fixed by insurance regulator IRDA.

What was the expectation from the issue?

The government was expecting to raise between Rs 12,500 and Rs 13,500 crore. It said it received an average price of Rs 303.67 for a share, 4.7% higher than the floor price of Rs 290. The stake sale yielded the government Rs 12,767 crore.

How does the ONGC’s disinvestment proceeds help the government?

So far this fiscal, the government has been able to raise about Rs 14,000 crore through disinvestment in public sector undertakings (PSUs), against the budgeted Rs 40,000 crore. While Rs 1,145 crore was raised through a follow-on public offer (FPO) of PFC, R12,767 crore came from 5% stake auction in ONGC.

What was the government’s original proposal for ONGC’s disinvestment?

The proposal of 2010 entailed offer for sale by the government of 5% paid-up equity capital of ONGC in the domestic market through public offering. A part of the shares were proposed to be reserved for employees also. It was proposed that employees and retail investors would be offered discount of 5%.

What led to repeated delays in ONGC’s offer for sale?

The department of disinvestment under the finance ministry for the first time in November 2010 proposed disinvestment of 5% of ONGC out of the government’s shareholding. The cabinet approved the proposal on December, 1, 2010. The issue was slated for March 2011 but despite all preparations, the launch of issue got delayed as the condition over the requisite number of independent directors could not be fulfilled in time. The issue was also again scheduled for July 2011, but it was postponed again due to announcement of the subsidy sharing and extra burden on ONGC, which led to the downward impact on the share price of ONGC. Another yet timeline of September 2011 was fixed, however, due to recessionary market conditions, the issue could not be launched.

What was government’s reasoning of the earlier planned FPO for ONGC not being a good option?

As per the finance ministry, once the intentions of the government coming up with an offering are in public domain, the share price comes under pressure. In the bearish capital market, this tendency is further accentuated. Moreover, the process of public offering is very elaborate and time consuming — excessive documentation, due diligence process by advisers, preparation of Red Herring Prospectus, and so on.

The regulatory requirement of requisite number of independent directors on the board needs to be fulfilled, without which the FPO is not possible. Most important was the timing of the FPO, which has to be within 135 days of the audited accounts as per US laws and the same is required to be complied with. Further as there are separate buckets for each category of investors, ie, qualified institutional investors, high networth individuals, retail and employees.

How the government justified the auction?

After missing repeated timelines, the new mechanism of auction was proposed to obviate all difficulties associated with an FPO. It was felt that the time to complete the entire process could be as less as one week. Thus, the overhang of FPO over a long period is minimised and the resultant hammering of the shares would be avoided.