Even before receiving the shares of Oil and Natural Gas Corporation (ONGC), auction investors are staring at notional losses of Rs 1,000 crore. And, the biggest loser: The Life Insurance Corporation (LIC) of India, which bailed out the government.
The ONGC stock closed at Rs 281.45 on Friday. That was 7.4 per cent or Rs 22.5 lower than the average auction price of Rs 303.95, at which 420.3 million shares were sold. As a result, the Rs 12,766 crore raised yesterday was worth Rs 11,819 crore — down Rs 947 crore.
The lack of enthusiasm for the auction has already triggered a blame game in the government. Sources in the disinvestment department said they had initially recommended Rs 260 as the floor price for the auction. However, the empowered group of ministers (eGoM) overruled that and set a price more than 10 per cent higher. At Rs 290, the floor price was nearly three per cent more than the market close of Rs 283 on Tuesday, when the price was announced.
The department was of the view the eGoM got carried away by the prevailing market price, which resulted in a huge embarrassment for the government. “At the original recommended price, the auction would have flown off the shelf," an official said.
It was only in the run-up to the auction that ONGC shares gained 7.7 per cent in the past month. During the period, key equity index, Sensex, gained 3.25 per cent. The last six-month average price of ONGC was around Rs 270, expected as the auction floor price by analysts.
Market expert S P Tulsian feels the merchant bankers, who advised the government on the share sale, are the real culprits.
"What was the need of six merchant bankers as advisors if LIC had to bail out the issue? These bankers have the expertise and the network among investors and if such a high floor price was their advice then it is a major disappointment," he says.
Morgan Stanley, Merill Lynch, Citi Group, HSBC and Nomura were the foreign bankers involved with the issue and JM Financial was the domestic firm acting as adviser to government.
Some like Vinod Sharma, head of business, private broking and wealth management, HDFC Securities, felt mistakes such as wrong keying-in and LIC’s late entry should not have happened. “Exchanges, on their part, had a mock session on February 29, which lasted four hours. But, the dealers perhaps were not interested in making use of the session.”
There was high drama in the ONGC auction, as exchanges declared bids had come for only 290 million shares. Later, it came to light the demand was low for the auction and LIC had to subscribe to more than 300 million shares. In a note to clients, Mumbai-based brokerage house Nirmal Bang said the pricing of the issue was expensive as there was already an overhang of the subsidy issue.
"The government went ahead with the auction method for the five per cent stake sale in ONGC while ignoring the real problem of subsidy-sharing amid surging crude oil prices. Its claim prior to the auction of several foreign investors and sovereign funds having shown interest fell flat. With the financial year-end fast approaching and in the wake of the government’s constrained finances, we believe there is growing risk of a higher subsidy burden on upstream companies," the note said. The only good, according to Sharma, is that the government shareholding has come down from 74 per cent to 69 per cent. That will increase the free float of the stock.
The increase in free float, in turn, will result in a higher weight of the oil and gas monolith on the indices. Its current weight is 2.36 per cent on the Nifty. That would rise to 3.9 per cent, according to a ballpark estimate. The higher weight would mean index funds would have to increase their allocations to ONGC accordingly.