Advance tax outflows and government bond auction mop-ups could add to the prevailing liquidity crunch to spoil the R12,000-crore ONGC follow-on offer opening on July 5. The ONGC share sale is key to achieving the R40,000-crore divestment target this fiscal.
The general liquidity squeeze in the economy is likely to impact subscriptions, with analysts fearing that ONGC may need to rope in support from domestic institutions at a time when markets are erratic.
Adding to ONGC?s worries, companies must pay the first instalment of advance taxes by July 15. This is expected to remove liquidity from the system leaving less money in the hands of prospective investors. Banks are already short of R60,000-70,000 crore every day due to the Reserve Bank?s steady interest rate hikes to curb inflation.
This deficit is expected to rise to R1 lakh crore per day by the middle of July. The government is planning to sell 42 crore shares adding up to a 5% holding to raise close to R12,000 crore. After the offer, the government?s holding in ONGC would come down to 69.14% from the current 74.14%. Road shows of the issue are expected to start from June 19. ?I don?t expect the ONGC offer to be a great success. The subscription is likely to be reasonable and will not be 10-12 times. The offer will garner good money only if it gives a huge discount to the current share price,? said Jagannathan Thunuguntla, equity head, SMC Capital. ?Participation from retail and high net worth individuals depends heavily on the interest rate scenario and liquidity condition. Both are adverse at present. Foreign investor interest in Indian markets this year has also remained weak due to the uncertain macro-economic scenario,? he said.
Last year, the country?s top 100 companies collectively paid R12,661 crore as advance taxes for the first quarter. This level is expected to be maintained this year, meaning more money will be needed from the banking system. A finance ministry official on condition of anonymity told FE: ?Due to advance tax payment, liquidity is expected to remain tight for a month.? Adding to the credit crunch, the government plans to raise R73,000 crore between June 20 and end-July through six bond auctions. This is expected to drain more funds from the banking system, leaving little liquidity for the ONGC offer. The government plans to borrow a total of R4.17 lakh crore in 2011-12. ?Currently, interest rates are pretty elevated, which can potentially have a negative impact on disinvestment. The macro-economic scenario ? which is largely uncertain ? too will have a bearing on disinvestment issues,? said Siddhartha Sanyal, chief India economist, Barclays Capital. The ONGC issue was initially slated to open first by March and then April. But the issue has been delayed since the company board did not have the required number of independent directors.
Experts believe the higher-than expected subsidy burden will affect ONGC?s valuations. With continuing uncertainty over the 2011-12 subsidy-sharing formula and rising commodity prices, the public issue is expected to take a beating. Any positive development on the royalty sharing front with Cairn India could act as a catalyst.