Opinion Credibility at stake

Let’s first question the tearing hurry for the government to auction its shares in ONGC Ltd,an upstream oil PSU that is forced to share a part of the petroleum subsidy burden. Staring at the prospects of the fiscal deficit significantly overshooting the 4.6 per cent of GDP target for 2011-12,the government quickly went into a huddle. Only to experiment with half-innovative solutions for raising revenues,auction being one,and buyback of government shares by cash-rich PSUs the other. It did not quite realise that the market has already factored in bad news on the deficit front. In fact,various estimates put the deficit at between 5 per cent and 6 per cent of the GDP for the year.

Finance Minister Pranab Mukherjee was more than just giving hints when he said that he was spending sleepless nights thinking of mounting subsidies. Unfounded fears of adverse political fallout have bound the government from raising prices of petroleum products and fertilisers even with high global crude oil prices. Naturally,petroleum subsidy has ballooned. But information about the total petroleum subsidy or the share of upstream and downstream oil PSUs is not yet available to investors. So for investors,especially foreign institutional investors,the auction was akin to putting the cart before the horse. Not that the government has not done its homework. Estimates — not made public yet — suggest ONGC may end up shelling out Rs 40,055 crore this year as its share of subsidy. The other two upstream companies,OIL and GAIL,together will chip in a total of Rs 10,000 crore. Last year,ONGC’s share was just Rs 24,893 crore. FIIs,for whom transparency matters the most,have no idea about this. Indeed,the profits that ONGC will post for the full year depend a lot on the subsidy bill. Besides,anyone will wonder if raising some thousands of crores of rupees through such pseudo disinvestment route will really set right the fisc. The last Rs 10,000 crore or Rs 20,000 crore of extra revenue doesn’t really matter.

Poor market intelligence further did the auction in. The government set the floor price for ONGC at Rs 290 for a Rs 5 face value share. The average three-month closing price of ONGC at the National Stock Exchange stood at Rs 269.8. This means,the issue was priced at a 7.5 per cent premium. With little information of future profit potential and many unknowns such as global crude oil prices,total oil subsidy burden and ONGC’s share,the government’s pricing could at best be described as bravado. The least the lead managers could have done was be honest about the unrealistic price. They should have advised the government to leave something (at least Rs 5) on the table for potential investors. Besides,both the government and merchant bankers did nothing to market the issue. Between 9.15 am and 3.20 pm last Thursday,the day of the auction,the issue saw a paltry 3.4 per cent subscription. The stock exchanges stopped updating the auction data after 3.20 pm. It was late,but the government did finally realise the issue would bomb,and worked the phones to get the Life Insurance Corporation,the state-owned,unlisted insurance giant,which doesn’t have a full-time chairman for almost a year now,to bail the issue out and spare the government its ignominy. It was not until six hours later that unconfirmed reports of the issue sailing through started being fed to the media. It is a shame that FIIs,who invested a whopping Rs 36,496 crore in equity in the first two months of 2012 in the secondary market,chose to ignore the ONGC offer for sale.

In fact,government officials cooked up a brilliant story for the media and investors that the last 10 minutes witnessed a barrage of bids leading to a system overhang. They even said the stock market regulator,the Securities and Exchange Board of India (Sebi),had been asked to investigate the glitch in the auction process. Even before Sebi announced the probe,a joint press statement by the Bombay Stock Exchange and the National Stock Exchange late in the evening said,“Exchange systems operated normally and smoothly and there were no glitches.” So much for the government’s story that faulted the auction system.

Post-facto,what should not be lost on the government is the fact that it was its failure to get the political economy formula right which made investors shun the auction. Keeping issues such as deregulation of diesel prices on the back burner for far too long will not only lead to a ballooning deficit,but will also adversely impact growth in the medium to long term. The collateral damage of the government’s first “successful” attempt at auction or offer for sale has been immense. It has led to an impression in the market that the auction was rigged. It is an open secret that the government got LIC,the custodian of millions of policyholders’ money,to subscribe to the issue in the last minute at arguably a higher price. This is a terrible market signal,coming just about days ahead of the budget for 2012-13. Not many will take the government’s book of accounts seriously. The government has put its own credibility at stake.

pv.iyer@expressindia.com