In the first disinvestment through block deal this fiscal, a ministerial panel on Thursday approved selling 10 per cent government stake in Indian Oil Corporation to Oil and Natural Gas Corporation and Oil India Limited to rake in Rs 4,800-5,000 crore (Rs 48-50 billion).
With Oil Ministry continuing to be opposed to selling IOC shares on stock market like other disinvestments, an Empowered Group of Ministers headed by Finance Minister P Chidambaram today decided to sell 24.27 crore (242.7 million) shares or 10 per cent government stake in the company to Oil and Natural Gas Corporation and Oil India Ltd.
"In-principle we have taken a decision for a block deal. Modalities will be worked out (soon)," Oil Minister M Veerappa Moily told reporters after the 35-minute meeting.
The stake sale will happen sometime next week after the boards of ONGC and OIL decide, Oil Secretary Vivek Rae said.
Sudhir Vasudeva, Chairman and ONGC, which already holds 8.77 per cent stake in IOC, said ‘most likely’ the 10 per cent stake will be split equally between ONGC and OIL.
"The 5 per cent stake will cost us Rs 2,200 to 2,300 crore (Rs 22-23 billion) and this amount will not have any bearing on our capital expenditure plans," he said.
OIL is sitting on a cash pile of about Rs 8,000 crore (Rs 80 billion).
"We feel that the share of IOC is grossly under-priced right now.
“And it commands more value.
“Normally, we would not want to do a block deal (but since share price is low) we thought we should follow this route which would enable revenues to be raised," Rae said.
IOC scrip closed 1.48 per cent up at Rs 212.05 on BSE.
The sale will be as per Securities and Exchange Board of India’s rules for block deal which says the rate should be one per cent higher or lower than previous day's closing price, he said.
"Boards of two companies have to now meet to pass a resolution," he added.
Rae said there will be no lock-in period and both ONGC and OIL would be free to encash
"We had wanted that there should be no lock-in period (for selling off the shares) and I think the EGoM has agreed to this.
“And this meets our concern," Vasudeva said.
Government in the past too had resorted to such block deals to shore up its revenues.
In late 1990s, the government had sold shares in ONGC, GAIL and IOC to raise Rs 4,643 crore (Rs 46.43 billion).
According to the cross-holding plan, ONGC bought 9.11 per cent in IOC and 4.83 per cent in GAIL.
IOC bought 9.61 per cent in ONGC and 4.83 per cent in GAIL. GAIL in turn bought 2.4 per cent in ONGC.
In 2006, IOC sold 1.92 per cent, or a fifth of its holdings in ONGC for Rs 3,672 crore (Rs 36.72 billion), recovering its entire initial investment and some more.
It also sold half its holdings (2.41 per cent) in GAIL for Rs 561 crore (Rs 5.61 billion).
The EGoM on January 9, 2013 deferred disinvestment of 10 per cent stake in IOC through an offer for sale on the stock markets owing to strong opposition from oil ministry.
The ministry felt IOC shares were way lower than the 52-week peak of Rs 375 reached on January 18 last year.
The Finance Ministry had planned to sell 24.27 crore (242.7 million) IOC shares to meet a tenth of its Rs 40,000 crore (Rs 400-billion) disinvestment target for current fiscal. Government holds 78.92 per cent stake in oil refiner IOC as on June 30.
The EGoM on Thursday discussed two options of either an offline sale (private placement) or a block deal for 24.27 crore shares of IOC.
Finally, the panel of Ministers decided to go ahead with the block deal, sources said.
A trade, with a minimum quantity of 5 lakh shares or minimum value of Rs 5 crore executed through a single transaction on a separate window of a stock exchange constitutes a block deal.
IOC stake sale will make up for more than one-tenth of the disinvestment target of Rs 40,000 crore (Rs 400 billion) fixed for current fiscal.
So far, government has raised about Rs 3,000 crore (Rs 30 billion).
"We are working very hard to meet the disinvestment target," Disinvestment Secretary Ravi Mathur said.