In turn, Gail is expected to take a 2.5 per cent stake in ONGC which would result in a payment of around Rs 625 crore. The company is not likely to exercise this option in the case of IOC as it would mean spending more money at a time when it needs funds to execute a range of projects, 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 crossholding arrangement.

With the revised structure, ONGC will need to fork out around Rs 1,700 crore for picking up a 10 per cent stake in IOC and Rs 350 crore for 5 per cent in Gail. In IOC's case, the outgo for the 10 per cent equity component in ONGC is around Rs 2,500 crore and Rs 350 crore for Gail. The total payout for ONGC would,therefore, be Rs 2,050 crore and higher for IOC at Rs 2,850 crore.

As per the original plan, both IOC and ONGC were to pick 10 per cent each of the Government's stake in Gail, which would have resulted in a total outgo of Rs 1,400 crore and reduced the Centre's holding in Gail to 76 per cent. In fact, unconfirmed reports indicate that in the changed arrangement, 10 per cent was earmarked solely for ONGC and not IOC. However, now it has been decided that the two navratnas will share the Gail equity component equally.

ONGC, experts say, would be justified buying out equity in both the companies. It will 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 international counterparts. The three companies, it may be recalled, already have 12.5 per cent equity each in Petronet LNG, the joint venture set up to cater to creation ofinfrastructure for liquefied natural gas.

Effectively, the revenue to the Government from the revised crossholding arrangement will be only marginally affected to the tune of Rs 700 crore (the 10 per cent which could have been taken up by IOC/ONGC). Calculations indicate that the three oil PSUs alone -- with their equity "swaps" -- will have contributed around Rs 5,500 crore. This, obviously, does not factor in the GDR offerings of Gail and IOC which are expected to rake in around Rs 1,000 crore and along with the Concor (Container Corporation of India) proceeds of Rs 225 crore, the total revenue to the government will be close to Rs 7,000 crore.

Eventually, after the crossholding arrangement, the government's 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 10 per cent crossholdingdeal with ONGC/IOC, the Centre's holding would be down to 86 per cent from the existing 96 per cent (exclusive of the 5 per cent GDR offering now underway).

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 actingupon them to push them to the limits."

INSIGHT
Savings will be marginal

It seems that the two oil companies (IOC and ONGC) have finally decided to put their foot down by reducing the purchase of Government's stake in Gail. However, the saving for the oil companies will be marginal. If the proposed cross-holding amount between the two companies was reduced, that would have resulted in greater savings.

The share price movement of the oil companies reflects that the market has not been taken in by the issue of equity swap. Inspite of all the talk about synergies, the market has downgraded these companies. During the last one month, the Gail and ONGC scrips have fallen by 30 per cent, Indian Oil by 16 per cent over a period when the Sensex moved up by 6 per cent.