ONGC to raise Rs 181 bn from three banks to finance HPCL acquisition

This amounts to half of its Rs 369-bn funding requirement for buying government's entire stake in the country's second-largest petroleum retailer

Oil and Natural Gas Corporation (ONGC) will raise nearly Rs 181 billion in debt to meet its funding requirement for acquisition of Hindustan Petroleum Corporation. ONGC has a funding requirement Rs 369.15 billion for buying government’s 51.2 per cent stake in the country's second-largest petroleum retailer.

The biggest portion of this debt, Rs 106 billion, will come from Punjab National Bank in the form of a short-term rupee loan. Bank of India and Axis Bank will lend Rs 44.6 billion and Rs 30 billion, respectively, to ONGC.

The loan agreement with PNB has a sub-limit of Rs 106 billion towards foreign currency loan for one year, said ONGC in a filing to the Bombay Stock Exchange, adding that with Bank of India it has a loan agreement of $300 million sub-limit for FCNR (foreign currency non-repatriable) and FCTL (foreign currency term loan) for one year.

Since ONGC will need to raise more money, it is likely to sell some of its equity in Indian Oil Corporation and GAIL India. ONGC holds 13.77 per cent holding worth about Rs 260 billion. It also holds 4.86 per cent stake in gas utility GAIL which is worth over Rs 38 billion.

On Saturday, ONGC signed a share purchase deal with the government for buying HPCL for Rs 369.15 billion, paying a premium of over 10 per cent, taking a 60-day weighted average of HPCL scrip. The company plans to use a mix of cash balance and short-term borrowings.

Market analysts, however, caution on the company offloading its entire stake in the two companies. “If ONGC sells, the market might find it difficult to absorb Rs 250-270 billion worth Indian Oil stock,” said an analyst. The government in August 2015 sold 10 per cent in Indian Oil through an offer for sale (OFS), fetching it Rs 93.69 billion which increased the float for the company.

ONGC chairman Shashi Shanker told reporters on Sunday that the company will not sell its liquid “assets in distress”. “We will use our cash first and then the liquid assets and debt will be the last option.” The company currently has about Rs 130 billion in cash reserve.

ONGC's acquisition would help Finance Minister Arun Jaitley to get over the revenue shortfall during the current financial year and narrow the fiscal deficit. The government targets to limit its fiscal deficit to 3.2 per cent of the GDP.