Capex Plan: ONGC spared buyback obligation

The government has exempted state-owned explorer ONGC from the twin obligations of buying back its own shares and issuing bonus shares in the current fiscal, a move that would help the upstream hydrocarbon to not cut back on its capex plan of Rs 32,000 crore for the year. Under the guidelines issued by the department of investment and public asset management (DIPAM) in May 2016, PSUs above certain defined thresholds have to buy back a portion of their shares; also, say the guidelines, state-owned firms with a certain level of ‘reserves and surplus’ must issue bonus shares. ONGC meets both criteria but a depleted cash surplus has turned it cautious.

According to official sources, the government has chosen to give ONGC a reprieve for this year from both the commitments, considering that it also had to shoulder the yoke of boosting the government’s ‘disinvestment receipts last fiscal by purchasing its 51% stake in oil retailer HPCL for Rs 37,000 crore. A zero-debt company till FY17, ONGC borrowed about Rs 25,000 crore in March 2018 to fund its acquisition of HPCL while it also dipped into its reserves and surplus for about Rs12,000 crore. After the transaction, ONGC’s surplus cash has depleted to a little over Rs 1,000 crore at FY18-end from over Rs 9,500 crore at FY17-end. The special buyback/bonus share waiver for ONGC comes at a time the explorer is also staring at the possibility of being asked by a fiscally wary government to again share the oil subsidy burden if crude prices surge beyond a certain level.

While one option for the government is to revisit the practice of the upstream company giving discounts on crude supplies to oil marketing companies to partly compensate for the latter’s under-recoveries on sale of petroleum products, some reports said it might choose to seek a ‘windfall’ by telling ONGC to pay a tax, probably in the form of a cess that kicks in the moment oil prices cross $70 per barrel. From nearly 60% in FY15, the share of ONGC and Oil India in petroleum subsidy declined to 10% in FY16 and further to nil in FY17. The DIPAM guidelines empowers the government to give exemptions from the buyback and bonus share commitments to companies if meeting these would constrain their capex plans. ONGC’s aggressive investments in exploration and production in the five years through FY18 saw a whopping capex of Rs 1.93 lakh crore funded from its reserves and surplus accumulated over the years.

Its ‘reserves and surplus’ stood at a robust Rs 1.54 lakh crore at FY17-end, but reserves have defined end uses. Reserves consist of capital reserves, securities premium reserves, general reserves and surplus for the year. Unlike surplus, reserves are usually parked in term deposits of various maturities and current accounts, besides mutual funds. The surplus is cash and cash equivalent instruments like current and savings bank balance and liquid instruments of less than three months’ maturity. Following the buzz on ONGC’s plan to sell its 49% stake in Pawan Hans to monetise non-core assets, the oil explorer’s stock rose 2.69% on Wednesday to close at `160.30 each on the BSE.