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MAY 31 2017

Integrated public sector oil company: Oil Ministry prefers making HPCL an arm of ONGC

  • Economic Times, ET Bureau / Hyderabad
  • Created: Wed 31st MAY 2017


To keep the brand names of ONGC and HPCL intact and leverage the expertise of both, the government is likely to opt for a subsidiary model wherein the latter will become an arm of the former, rather than carrying out the proposed merger of the two entities.

In a note, the petroleum ministry said: “Core competencies, organisational structures and work cultures of these entities could be quite different, making mergers a tricky affair.” However, a subsidiary structure wherein the government gives its 51.1% stake in HPCL to ONGC will serve the twin purpose of providing a robust consolidated balance sheet enabling it to win major oil deals… and the government through ONGC, a state-owned entity, will continue to have control over HPCL. “For one, it would not be a ‘merger’ — ONGC and HPCL will continue as separate entities within their own domains of expertise,” it added.

Finance minister Arun Jaitley, in his latest Union Budget speech, had said the government wanted to create an integrated public-sector oil company having the wherewithal to match the competitiveness of international oil and gas companies such as Exxon Mobil and BP. “It will give them (the entities which will be merged) capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders,” Jaitley had said.

Since then, talks have been rife about the merger of the oil marketing company with the national oil explorer, though any official confirmation is yet to come. However, petroleum minister Dharmendra Pradhan, along with other industry officials, has maintained that a model is being worked upon for the merger process.

According to the oil ministry proposal, the transfer of 51.1% government stake in HPCL to ONGC will fetch the government Rs 30,000 crore which help it in meeting its disinvestment target of Rs 72,500 crore for 2017-18. For ONGC, the total cost may be Rs 45,000 crore because apart from paying for the government’s stake, it will also require to make an open offer for public shareholders to buy additional 26% at around Rs 15,000 crore.

ONGC chairman and managing director DK Sarraf last week told reporters in New Delhi that the company has submitted its proposal regarding the issue to the petroleum minister with detailed reasons. “Post that, the ministry held a meeting with all companies. A lot of permutations and combinations are being talked about,” he said.

MK Surana, chairman and managing director of HPCL, told reporters recently that the companies are looking for ways of alignment but an actual model is yet to emerge. He, however, emphasised that HPCL will continue to deliver value, and the name and goodwill of the company will continue to remain. “Whenever two companies align, both should have value additions,” he said.

An HPCL executive not wishing to be named told FE that in order to keep the name and brand of the company intact, the alignment process has to be through the subsidiary route. According to experts, a subsidiary model will be more beneficial compared with a merged entity and the goal of creating a giant with big financial muscles will be achieved.

“The advantage will be that both the companies will be able to retain their USPs,” said Sanjay Grover, partner and tax leader-oil and gas practice, EY, a consulting firm. He added that merging the two entities will have a different set of challenges and both the companies will be able gain from each other’s expertise, experience and most importantly their balance sheets.


Delhi Uttar Pradesh TOTAL Finance Gas Oil Ministry Oil ONGC Petroleum Hindustan Petroleum Corporation Limited Tax Oil and Gas Budget ongc

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