The initial government decision to get PSU oil companies to buy shares in each other had two objectives?one was to shore up government finances, which were not particularly comfortable in 1999-2000, and two, the dismantling of the administered pricing mechanism (APM) in the petroleum sector was round the corner.
The recent decision to allow the PSU oil companies to sell off their cross-holdings is a welcome move and provides flexibility to them. IOC, for instance, might like to sell off its stake in ONGC to improve its liquidity position, which is drying up owing to the pricing policy of the government. ONGC and GAIL might not be interested in offloading their stakes, as they do not need the money right now. Importantly, the stakes will be offloaded in the market and not bought back by the companies.
Interestingly, the arguments made in favour of dissolving the cross-holding are in contrast to those offered a few years ago, when they were formed. Then, it was argued that APM dismantling might result in uncoordinated functioning of the oil companies and that the freedom could be misused, given their dominance in the industry. For instance, GAIL sources gas from ONGC and hence, the former would be more secure if it were sitting on the latter?s board. Similarly, IOC sources crude oil from ONGC and hence, a board position would definitely strengthen its position.
However, now, the argument offered is exactly the opposite?since they have diversified and in a sense are competitors, they should have little to do with each other in terms of equity holding.
The recent decision of the government to facilitate the cross-holding will shore up the companies? balance sheets. It will also give it a nest egg, if the Rangarajan committee decides to pare the marketing and refinery margins. This is relevant since companies like IOC have large capital expenditures that cannot be deferred as they have political overtones.
If, say, IOC decides to sell its stake in ONGC, it will also mean a slow thin crack in the shelved disinvestment proc-ess. In fact, it will provide tremendous demonstration effect to the Left parties since any sale will realise upward of five times the invested amount?IOC?s investment in ONGC stock of Rs 2,700 crore in the year 2000 is now worth about Rs 15,000 crore.
The writer is a former petroleum secretary