The Inter Company Jugaad: Selling IOC to ONGC and Oil India

1 Comment » Written on January 17th, 2014 by
Categories: IOCL, Oil India, ONGC

In order to make up for its fiscal deficit, the government has been trying ingenious stunts. A ministerial panel has decided that the government will sell shares they own in IOC (79%) to ONGC and Oil India Limited, both companies that are controlled by the government.

Consider an alternate situation: Tata Sons decides that TCS will use its large cash hoard to buy out their stake in other Tata Companies. Immediately, there would be outrage saying this is a horrible thing for TCS shareholders, which has better uses of that cash (even if it doesn’t actually use it).

Why is it any different because it’s the government? Why shouldn’t ONGC and OIL shareholders be furious that the government - one shareholder - can get access to their cash while they do not? A better way to deal with things is to have a dividend, where both the government and the marginal shareholder will get a piece of the pie.

The share sale will yield Rs. 5,000 cr. This, along with the Rs. 20,000 cr. that the government earns as part of the Coal India massive dividend, gives the government more room.

While this is an accounting trick - to sell your holdings to another company you control - the better method would have been to sell these shares in the stock market to everyone including retail shareholders. The recent Powergrid issue was subscribed over 6.7 times, with just retail investors putting in nearly 5,000 cr. (High Net Worth Investors bid for Rs. 10,000 cr!)

There is demand at a price, but the government is loathe to sell at that price. Thats why they have to resort to accounting gimmicks rather than real reform.

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One Response to “The Inter Company Jugaad: Selling IOC to ONGC and Oil India”

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