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Chinese shareholding in Indian rig operations being probed

By Dev Chatterjee & Jyoti Mukul
August 17, 2020 15:03 IST
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The scrutiny started when it came to the government’s notice that Shelf Drilling, a company that operates one third of ONGC’s contracted jackup rig and earns a revenue of close to $220,000 a day, has China Merchant Group as its single largest shareholder.

The Indian defence ministry and ONGC have started a thorough investigation into Chinese shareholding in rig operations in Indian waters, which is posing a security and surveillance threat to the country’s strategic sectors such as oil and gas.

 

Fresh guidelines will be issued to make them much more stringent for strategic sectors, say sources.

The scrutiny started when it came to the government’s notice that Shelf Drilling, a company that operates one third of ONGC’s contracted jackup rig and earns a revenue of close to $220,000 a day, has China Merchant Group (a key member of Belt and Road Initiative) as its single largest shareholder.

Dubai-based Shelf Drilling was a contractor with ONGC for many years and till recently, was listed on Oslo stock exchange and owned by three private equity players.

In 2019, CMG took a strategic stake in Shelf Drilling to become the single-largest shareholder in the company.

According to the public data, CMG directly holds 19.4 per cent, while private equity players, Castle Harlan, CHAMP Private Equity, and Lime Rock Partners each have 12.5 per cent stake.

CMG also has representation through two directors on the board of Shelf Drilling.

After the strategic stake purchase by CMG, one of the original investors, Champ PE has withdrawn its board representation and is no more considered an insider.

According to Shelf’s annual report, CMG can control the management and take decisions.

“The recent notification by Indian government has objectively clarified the percentage stock participation threshold for entities/citizens of neighbouring country sharing land borders with India.

"We would like to confirm that we are in compliance with the prescribed threshold,” said a Shelf Drilling spokesperson.

An ONGC official said the contracts with Shelf Drilling were ongoing contracts awarded at different point of time having contract duration of three years with present contracts continuing up to 2022.

“All government guidelines are followed by ONGC while awarding any contract and the same will be done in future as well,” an ONGC spokesperson said in response to emailed questions.

A senior official said ONGC cannot stop ongoing projects midway though they don’t go into ownership issues at the time of bidding and only follow the qualification criteria.

“However, we abide by government norms and the directive relating to firms from neighbouring countries will also be followed for giving contracts henceforth,” said the official on condition of anonymity.

In an order dated July 23, 2020, the Ministry of Finance said any bidder from a country which shares a land border with India will not be eligible to bid in any procurement of goods, services, or works unless it is registered with the competent authority.

The order extends this restriction to all state-owned units such as ONGC and OIL.

The definition of ‘bidder from a country which shares a land border with India’ clarified that it includes any entity which is substantially controlled through entities incorporated, established or registered in such a country or an entity whose beneficial owner is situated in such a country; and a consortium or joint venture where any member of the consortium or joint venture falls under any of the above.

In case of a company, ‘beneficial owner’ is to be determined on the basis of controlling interest or exercising control where controlling interest is defined as ownership of, or entitlement to, more than 25 per cent of shares or capital or profits.

The control definition also includes the right to appoint majority of the directors, or to control the management or policy decisions, including through shareholding or management rights or shareholders’ agreements or voting agreements.

“Although this bold decision may be adequate for certain sectors, but for strategic sectors, the entry barrier should be made more stringent.

"In such cases, any Chinese involvement, especially in the backdrop of border skirmishes, should be a strict no,” said a source close to the development.

As the current CMG stake is below the 25 per cent threshold in Shelf Drilling, there is a risk that they will be able to evade the scrutiny that is essential for the sensitive oil and gas sector.

Bulk of Indian offshore oil and gas activities are in the sensitive western front stretching from coastal Maharashtra to coastal Gujarat abutting Pakistan.

By allowing Chinese-controlled oil rigs in such a sensitive area, the security risk is paramount as these rigs can be used as surveillance platforms for Indian defence installations along the coast.

India, say sources, should not allow Chinese presence, in any form, at the prolific “Bombay High” oil and gas producing block.

In such a scenario, according to sources, “Shelf Drilling will to be classified as being a ‘bidder from a country which shares a land border with India’.

"This will prohibit it from participating in any on-going or future tenders.”

Photograph: Edgar Su/Reuters

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Dev Chatterjee & Jyoti Mukul in Mumbai/New Delhi
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