IOC rights issue deferral signals no GOI shift on disinvestment policy

Indian Oil's decision to withdraw its Rs 22,000 crore rights issue highlights the govt's reluctance to reduce its stake in state-run enterprises, as fiscal priorities shift to sectors like rail, roads

India’s largest state-owned oil marketing company, Indian Oil Corporation (IOC), is caught between the rock of the government’s bare minimum shareholding and the hard requirement of raising over Rs 1 trillion to finance its projects.

Since no disinvestment is planned despite the government’s fiscal constraints, the company will have to redraw plans to finance its capex.

On Monday, the Maharatna company informed the stock exchanges that it was withdrawing a Rs 22,000 crore rights issue. This is the first time any state-owned company in India has taken such a step, according to Prime Database.

The reasons the company gave were clear: the majority shareholder, the government of India, advised the board that it would not subscribe to the issue.

The regulatory filing noted, “MoP&NG (ministry of petroleum and natural gas) has conveyed that no funds have been allocated for capital support to oil marketing companies (OMCs) in the Budget 2024-25, as against the earlier proposed allocation of Rs 30,000 crore. Therefore, in view of the Government of India’s (promoter) non-participation in the rights issue, the board at its meeting held on September 30, 2024, decided to withdraw the proposed rights issue of equity shares.” In a rights issue, the new shares are offered only to existing shareholders.

In July 2023, IOC secured board approval to raise the rights issue. In its filing with the exchange, the company had not specified why it wished to raise the sum, but given the huge capex budget, it was expected that most of the funds would be used for this purpose. The largest of these is the plan to almost double the capacity of its flagship Panipat refinery from 15 MMTPA to 25 MMTPA at a budget of Rs 38,231 crore. Other projects, including the modernisation of the Gujarat, Barauni, and Paradip refineries, will cost the company another Rs 47,551 crore, as per its investor presentations. For FY25 alone, the company plans to spend Rs 26,853 crore on its capex.

IOC would have been able to raise the money from the market, given its pre-eminent position in the Indian market. However, the problem lies with the finances of its largest shareholder, the government of India. The government holds just a 51.5 per cent stake in the company, the largest of the three state-owned ones. The others are BPCL and HPCL, which is a subsidiary of mainly upstream company ONGC. The government’s just-above-the-threshold shareholding means any share float by IOC has two repercussions.

Either the government must allow its shareholding in the company to dip below the majority mark—a significant decision—or it must subscribe to the issue. At the current IOC share value of about Rs 178.9, this would have required the government to invest close to Rs 15,000 crore in the rights issue. Despite holding a 42 per cent market share in petroleum products in FY24 with over 60,900 touch points and securing its highest-ever profit of Rs 39,619 crore, the company’s shares are trailing its peers. Deferring the issue is another pain point for the company. A mail sent to IOC from Business Standard has not received a response so far.

But the government has other priorities. As the regulatory filing itself notes, those are not in this sector. One of them is capex spending in other sectors like railways. So even though the total allocation is a princely Rs 11.11 trillion, there is no allocation for the petroleum and natural gas sector. The interim budget had projected Rs 30,000 crore support for the sector.

A difficult election victory has made it imperative for New Delhi to focus on capex in more visible sectors like railways and roads, particularly in states like Andhra Pradesh and Bihar. The rest of the government’s available funds will be spent on education, wages under MGNREGA, and similar programmes.

“The government could have used this opportunity to renew the disinvestment programme,” said Pranav Haldea, Managing Director of Prime Database Group.

In the past few years, the only company where the government has sold management to the private sector is Air India. In the FY22 Budget, finance minister Nirmala Sitharaman announced a government policy of having only the bare “minimum presence of public sector enterprises.” Except in four sectors, others were to be privatised or merged. The four strategic sectors where the government would retain state-owned enterprises included the petroleum sector.

This ambitious disinvestment plan has not progressed over the years. "Budget FY22 had informed us of plans for strategic disinvestment but unfortunately things didn’t move since", Haldea added.

The petroleum and natural gas sector has 11 state-run companies, including IOC. Monday’s decision to shelve the rights issue indicates there are no proposals to revive disinvestment as government policy.