Contrary to investor expectations, the government is unlikely to do away with the ad hocism in dividing the annual oil subsidy burden among itself, crude oil producers like ONGC and fuel retailers like IOC before it makes follow on public offers in ONGC and IOC in the last quarter of this fiscal.
ONGC maintains that clarity on how much subsidy burden the three stake holders have to bear every year, is essential for better valuation.
Disinvestment secretary Sumit Bose told FE, We are now preparing a Cabinet note on the follow on public offers in IOC and ONGC. Subsidy sharing is not part of it as it is a separate issue.”
Petroleum ministry officials said it was unlikely that a permanent subsidy sharing formula would be evolved any time soon. “Investors are intelligent. They should know that there are some uncertainties with respect to subsidy-sharing,” another government official told FE .
ONGC CMD R S Sharma told reporters last month that before the company makes a filing with the capital market regulator Sebi for the FPO, the government has to bring in more clarity on the subsidy sharing mechanism and appoint five more independent directors on the board.
“We are hopeful that these issues will be resolved,” Sharma said then. ONGC will approach Sebi by January 2011 for the offer.
Last fiscal, upstream oil companies ONGC, Gail India and Oil India Ltd met the losses on account of selling petrol and diesel below cost, while the government suffered most of the losses from kerosene and LPG. A small portion was borne by retailers IOC, HPCL and BPCL too. The government was the biggest contributor of subsidy last fiscal at slightly more than 56% of the total under-recovery of Rs 46,051 crore, followed by 31.3% by upstream companies and 12.2% by retailers.
The year before, the three stakeholders shared the burden equally. However, this fiscal, the petroleum ministry wants the government to meet two thirds of the estimated Rs 53,000 crore under-recovery at a crude price of $75 a barrel. Finance ministry sources said that only when they prepare the revised budget estimates in November, they would get clarity on how much subsidy the government will be able to give this year. Although a large part of downstream retailers’ losses are met by the other two stake holders, they too have to bear a share.
“Everybody knows what is the best solution,” the government official mentioned earlier, said, referring to de-regulation in diesel, which would reduce the subsidy requirement. But if that is not happening now, the uncertainty on subsidy would persist, he said.
The Kirit Parikh panel on sustainable pricing of petroleum products had suggested that in order to reduce the under-recovery, ONGC and Oil India should give more price discounts to refiners when crude becomes more expensive. It had also recommended less kerosene allocation to states and to raise the prices for kerosene and LPG.
Sumit Bose said the paperwork for the disinvestment in IOC and ONGC was on schedule and that he was confident of concluding the public offer process this fiscal itself.