GAIL's stake has been confined to this level as it is not cash-rich and also needs to set aside substantial money for some vital investments, the most recent being a gas pipeline from Kandla to Loni. However, sources say that the company would still be allowed to have a board representation on ONGC as part of the cross-holding arrangement.

Latest developments indicate that IOC would also buy 10 per cent of the government equity in ONGC which works out to a relatively high Rs 2,500 crore. The Fortune 500 company, unconfirmed reports add, has been asked to avoid taking a stake in GAIL as it has other projects on hand which require a high capital outlay. "IOC isbelieved to be keen on buying out a part of the centre's stake in GAIL but this is not likely to be given the go-ahead as, after a hefty payout for the ONGC portion, it will have to meet other commitments in the Ninth Plan," experts say.

As for ONGC, it will need to roughly fork out Rs 1,700 crore for the IOC component and Rs 700 crore for the centre's 10 per cent stake in GAIL. The expenditure, according to experts, is "well worth it" as the cross holding approach would preserve the share capital and not extinguish it as in the case of a buyback. Interestingly, the net outgo for ONGC in buying out a stake in these two companies would still be lower than IOC's in its own.

Further, ONGC would be justified buying out equity in both the companies. It will be a synergy of sorts with GAIL in the form of gas pipelines while a crossholding with IOC will mark its foray into the downstream sector and help it in its endeavour to become a fully integrated oil company on the lines of its internationalcounterparts.

Effectively, when the move is approved by the government, its stake in ONGC would be down from 96 per cent to 83.5 per cent (10 per cent to IOC and 2.5 per cent to GAIL from its own stake). In the case of IOC, this would mean a reduced level of 81 per cent from 91 per cent (after 10 per cent is offered to ONGC) while in GAIL, post the 2.5 per cent crossholding deal with ONGC, the centre's holding would be down to 93.5 per cent from the existing 96 per cent.

To the government, the move by the three oil companies would be the best piece of news as it would translate into an inflow of over Rs 5,000 crore which will adequately meet the disinvestment target set for the current fiscal. It would also pave the way for other PSUs to exercise such a crossholding option in the future.

In the oil sector, a beginning could be made in the case of Bharat Petroleum Corporation and Cochin Refineries. A plan which is under evaluation involves selling the government's stake in CRL, Madras Refineries and IBPto BPCL which, in turn, will offer 3 per cent of the centre's stake to these companies.

The idea of an equity swap between IOC and ONGC was, in fact, mooted by former petroleum secretary Vijay Kelkar, now finance secretary, in the second Vasant Sheth memorial lecture in 1997. To quote: "The most interesting possibility for equity swap would be between IOC and ONGC and thus create a vertically integrated oil company whose size and potential capability is equal to some of the international majors. Such an organisation would be of crucial importance to our country's energy policy and security."

During the course of this speech focusing on ONGC, Kelkar said: "ONGC will have to be involved in marketing so that they are closer to the customers. Here "equity" based alliance with a marketing company like IOC becomes important. In a market economy, customers are the major driving force to stimulate innovation and ONGC must have a force acting upon them to push them to the limits."

IOC and ONGC are alreadyconsidering working together in petro-related activities both here and abroad. This would translate into a formidable duo operating in vital areas like exploration, production, refining, petrochemicals, power and marketing.