Business standard updates 2-3-2012

Cabinetnod to PSU buybackplan

BS REPORTER New Delhi, 1 March The government today gave its approval to the Central Public Sector Enterprises (CPSEs) to go for buyback of shares, as it auctioned five per cent shares of ONGC on the Bombay Stock Exchange. Officials of the Department of Disinvestment (DoD) said, with the Cabinet nod, boards of cash-rich companies would be able to take a decision on buying back government stake. Coal India, NTPC, SAIL, NMDC, Oil India, BHEL and MMTC are among the companies with substantial cash. Buyback and bulk sale, which include auction of shares, are part of the extended ambit of disinvestment options proposed by the Department of Disinvestment. The Securities and Exchange Board of India (Sebi) has already put in place mechanisms for completing auctions and buybacks within days. The earlier process could take months. The government is possibly tapping the route to garner revenue from stake sale in the Central public sector enterprises quickly, as it has to look for resources to keep the slippage on the fiscal deficit front to the minimum. The Cabinet nod for buyback will open another window for collecting more revenue from disinvestment during the last month of the financial year. At the end of the 10 months ending January, the fiscal deficit was ~4,34,933 crore or 105.4 per cent of the target, according to the Controller General of Accounts figures released on Wednesday. The government had pegged the fiscal deficit for 2011-12 at 4.6 per cent of the gross domestic product or ~4,12,817 crore. The disinvestment target for 2011-12 is ~40,000 crore but the government has collected only ~11,44.55 crore this financial year, from stake sale in Power Finance Corporation. The ONGC auction conducted today is slated to add about ~13,000 to this account. A senior disinvestment department official said opting for buyback and auction routes does not mean the government would not be use initial public offerings and follow-on public offers for disinvestment. The process for stake sale in a few other companies, including Oil India, was likely to start soon, he added. The buyback proposal, along with other options, was presented before the Cabinet in the first week of January. But it was then decided that more discussion was needed before approval. Process for stake sale through market route in Oil India and other companies likely to begin soon Company Cash & bank balance as on Sep 2011 Coal India 54,980.06 ONGC 27,441.86 NTPC 17,914.44 SAIL 15,684.54 NMDC 20,725.47 Oil India 13,589.71 BHEL 7,949.11 *As on March 2011 In ~crore Compiled by BS Research Bureau Source Capitaline HEAVYWALLET

ONGCscrapes through, barely

BS REPORTERS Mumbai/New Delhi, 1 March Call it a technical glitch or goofup — but the end result was chaos and confusion. Oil and Natural Gas Corporation’s share auction fell marginally short of full subscription today. Against 427.77 million shares on offer, bids were received for 420 million, or 98.3 per cent. However, the government raised ~12,766 crore, suggesting some bids came above the floor price of ~290 a share. This came at the end of a day of high drama. While the exchange websites were stuck at a bid quantity of 14.3 million shares, exchange officials informed media houses the offer had closed with bids for 292.2 million shares received on both exchanges. Later, at 4.36 pm BSE sent out a release saying, "Bids are being reconciled with the funds received. Once it is done the final numbers will be published." No further details were received till 9pm, more than three hours after the scheduled time of 5.30 pm originally fixed by the exchange to come up with the final allocation list. In New Delhi, after nearly six hours of closed-door meetings, additional secretary, disinvestment, Sidhartha Pradhan told reporters the delay in confirmation of the full subscription of the shares on offer was due to difficulties in uploading. "There was a difficulty in uploading of bids that had come well within time before 3.30. The uploading is still going on. Roughly about 400 million bids have been uploaded as of now," said Pradhan, nearly six hours after bidding closed. Pradhan said there was a mix-up between the custodian and the exchanges and Sebi was investigating so that such glitches did not happen again. Pradhan also denied that stateowned institutions were asked to bail out the offer after it was undersubscribed. "We have not asked anybody. The decision to invest is purely theirs." But, it is obvious Life Insurance Corporation (LIC) saved the day for the government. The exchanges in a joint statement clarified late in the night that “while the buy orders at both exchanges reflected a demand of 292 million shares around the market close, there were certain buy orders which were not immediately confirmed or were erroneously rejected by custodians due to a mismatch at the custodian end, even though, the orders were funded”. “These orders were not reflected in the demand of 292 million shares. After rectification of these errors, the final demand was for 420 million shares. Monies and orders received after normal market close have not been considered by the exchanges in the offer for sale,” the statement added. Turn to Page 14 >First-ever share auction ends in chaos; LIC saves the day for the govt FINANCE 7 >>Pricing, subsidy-sharing mardemand The government has given its approval to Central Public Sector Enterprises to go for share buybacks. According to officials in the disinvestment department, the boards of cash-rich companies would be able to decide on buying government shares in blue-chip state-owned companies. Coal India, NTPC, SAIL, NMDC, Oil India, BHEL and MMTC are some companies with substantial cash. P4 >Cabinetnod to PSU buybacks to perk up disinvestment ONGC INTRA-DAY Share price on BSE(in ~) HOW IT HAPPENED |The problem arose because of the rejection of orders placed by LIC through the custodian (Stock Holding Corporation of India) |The money came before the closing time after the placement of the order, but was rejected as the ‘self-funding’ button was pressed in place of ‘custodian funding’ |As the order had come much before the closing time and the money had also come before time, the LIC bid was accepted only after the custodian confirmed there was an error |The National Stock Exchange then accepted the order

Pricing, subsidy sharing mar demand for ONGC UJJVALJAUHARI Mumbai, 1 March The lukewarm response to the government’s offer to sell its five per cent stake in oil and gas major, ONGC, through the first-ever auction process to institutional investors, may be attributed to the lack of clarity on the subsidy-sharing mechanism and the offer’s pricing. In the backdrop of these issues, most experts believe the stock may see some pressure in the near term. Ambareesh Baliga, chief operating officer at Way2Wealth, feels the floor price of the auction led to the lukewarm response to the offer. He said the share was trading at ~275-280 levels when the auction price was announced, pushing the stock price higher. “If we look at the average price over the past few months, it would come to ~260-265 levels. Thus, the floor price should have been near ~270. The premium was unjustified, particularly looking at the subsidy issues that ONGC faces, which have adirect bearing on its profitability.” Mehraboon Irani, head of private client group business, Nirmal Bang, said the response to the offer came as a blow to the government. He added this resulted from a desperate attempt by the government to fill its coffers in a short time. He, however, said the price could not be questioned, as the government could not have sold at a lower price. This was because otherwise, questions would have been raised in Parliament. The stock, however, is unlikely to correct sharply from Thursday’s closing of ~287.85 (down 1.87 per cent compared to Wednesday’s close). Baliga believes this kind of a response to ONGC’s auction offer would pave the way for future issues to be priced at a discount on market prices. A look at previous examples indicates initial public offerings (IPOs) of public sector units that have been priced at a premium, barring a few, have either been under-subscribed or listed at a discount. He said says the NHPC IPO was a perfect example of this. ONGC’s stock price, according to Baliga, would correct to at least to ~275-280 levels. Some other analysts feel the stock may correct slightly, but not sharply. Arindam Pal, analyst at Asian Market Securities, said, “The fair value of the ONGC stock is around ~350. So, it should have moved higher, had the auction been oversubscribed. However, now, sentiments have been affected.” Most analysts feel one of the key reasons for the lukewarm response to the auction was lack of clarity on subsidy sharing for oil companies. Earlier, concerns were raised by foreign institutions when ONGC had attempted the follow-on public offer, as changes in subsidy sharing (percentage) impacts ONGC’s profitability and adds to uncertainties. ONGC, which had shared 33 per cent of the total subsidy in the quarters ended June September, saw its subsidy share rise to 47 per cent in the quarter ended December. Thus, while the first two quarters of 2011-12 saw a year-on-year growth of 11.8 per cent and 60.4 per, respectively, in its adjusted net profit, the third quarter saw ONGC’s profit tank 33 per cent, despite higher crude oil prices. The premium was unjustified, particularly looking at the subsidy issues ONGC faces, which have a direct bearing on its profitability