I-Bankers favour ONGC FPO only after Cairn verdict

NEW DELHI: The government should hold state-run explorer Oil & Natural Gas Corporation’s follow-on public offer until the Cabinet Committee on Economic Affairs (CCEA) gives the final verdict on the controversial Cairn-Vedanta deal, at least two merchant bankers have told the finance ministry.

ONGC’s valuation would boost if the CCEA accepts its argument that royalty from the Rajasthan oil block should be recovered as cost from its partner Cairn India, the bankers said in a meeting with finance ministry officials on Monday.

The exploration firm’s $2.9 billion issue is to open in the first week of July. “ONGC’s stock is under pressure due to excess fuel subsidy payout in 2010-11 ,” one of the merchant bankers present at the meeting told ET on condition of anonymity. “The explorer expects a decision in its favour, which will ease its royalty burden significantly and raise its valuation immediately .”

But a senior official in the department of disinvestment said there was no move to link the timing of ONGC’s public offer with the Cairn-Vedanta decision. “We will go ahead with the issue after independent directors are appointed on the ONGC board,” the official said.

The department of disinvestment is an arm of the finance ministry. Six merchant bankers — Bank of America, Citigroup, HSBC, Nomura Holdings, JM Financial Services and Morgan Stanley — are managing the ONGC issue. The government plans to raise about Rs 13,000 crore by selling a 5% stake in the firm in which it holds 74.14%.

Senior executives at ONGC said the company was sticking to the government-set deadline for the issue. “It is the government which is selling its stake in the company and it will decide its timing,” an ONGC executive said. “Of course, a clarity on issues like subsidysharing and royalty burden would certainly help in company’s better valuation.”

The $4-billion royalty obligation has been in dispute between ONGC and Cairn India. ONGC owns a 30% stake in Cairn India’s Rajasthan oil block, but pays the entire royalty on production under a 15-year-old contract.

ONGC, however, claims that a clause in the contract allows it to recover the cost of royalty from the total revenue of the field before profit is calculated.