Close on the heels of the Coal India decision to pay an all-time high R16,485-crore special dividend plus the resultant dividend distribution tax of R3,100 crore to the government, an empowered group of ministers (EGoM) chaired by finance minister P Chidambaram on Thursday approved the sale of a 10% stake in state-run refiner Indian Oil Corporation (IOC) through a block deal to Oil India and ONGC, two other public sector firms.
The transaction could fetch the government R4,800-5,000 crore and is expected to happen in a week or so, according to oil secretary Vivek Rae. He said that ONGC and OIL might take 5% stake each in IOC through this deal, although a final call is yet to be made. He also said the shares would be sold at discount or a premium of 1% to the prevailing price of the IOC scrip.
The IOC share closed 1.3% higher at R212.25 on Thursday, while those of ONGC and Oil India slid 1.7 % and about 1%, respectively. The EGoM decision came after market hours.
In the case of Coal India, trade union protests have come in the way of the government plan to sell a 10% stake in the miner (the plan was changed to a 5% stake sale but even that hasnt worked), while the IOC stake sale stumbled upon poor market response and the petroleum ministrys reluctance.
Thankfully for the government, the path is now clear for the sale of its residual stakes in Hindustan Zinc and Balco without having to seek Parliament approval, as the attorney general has given a favourable opinion.
In principle, we have taken a decision for a block deal. Modalities will be worked out (soon), oil minister M Veerappa Moily told reporters after the EGoM meeting, also attended by heavy industries minister Praful Patel and commerce and industry minister Anand Sharma, apart from him and Chidambaram.
Though a final decision on the proportion of stakes each company will take would be decided by respective company boards. Sudhir Vasudeva, Chairman of ONGC, which already holds 8.77% stake in IOC, said most likely the 10% stake will be split equally between ONGC and OIL. The 5% stake will cost us Rs 2,200 to 2,300 crore and this amount will not have any bearing on our capital expenditure plans, he said. As of March 31, 2013 ONGC had a cash reserve of Rs 13,219 crore, while OIL was sitting on a cash pile of Rs 12,133 crore.
The oil ministry was initially reluctant to let IOC stake sale through because its scrip has lost over 50% since 2010. The ministers decided to take the block deal route to sell companys 24.27 crore shares to OIL and ONGC.
We feel that the share of IOC is grossly under-priced right now. And it commands more value. Normally, we would not want to do a block deal but since share price is low, we thought we should follow this route which would enable revenues to be raised, Rae said.
The breakthrough in IOC and CIL disinvestment would be a booster for the government, which until now has just raised Rs 3,000 crore through PSU stake sales, as against the budget target of Rs 40,000 crore.
The government is pushing PSUs for higher dividends if the stake sale in PSUs fail as revenue receipts through tax are expected to fall short by over Rs 60,000 crore. Due to the short fall in tax income the government is also expected to roll over subsidy payments of about Rs 1.2 lakh crore to next year and slash expenditure massively as it did last year.