Sebi saves ONGC subsidy from minority investors' ire

The Securities and Exchange Board of India (Sebi) has saved the government from a certain defeat it would have faced at the hands of minority investors of Oil and Natural Gas Corporation (ONGC) in the matter of subsidy payout to downstream marketing companies.

Every year, the explorer along with GAIL, transfers a significant portion of its cash reserves to Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum to offset their losses from retail selling of diesel, kerosene and cooking gas.

At Rs 56,384 crore, ONGC's subsidy bill for FY13-14 was 2.5 times its net profit, over half its revenue and 43 per cent of its net worth of Rs 1.24 lakh crore. Although falling crude oil prices have narrowed the differentials this year, the payout is still likely to be significant.

According to the original norms proposed by the regulator in April, ONGC's annual subsidy payout would have qualified as a material "related party transaction" (RPT) and, therefore, would have required a majority of minority vote to pass muster.

But, in a specific amendment announced on Monday, Sebi exempted government companies from application of sub-clauses VII(D) and (E) of clause 49.

"Provided that sub-clause 49 (VII)(D) and (E) shall not be applicable in the following cases: (i) transactions entered into between two government companies;…" the circular said.

Sub-clause VII(D) required that all related party transactions should have prior approval of audit committee. Sub-clause VII(E) said, "All material related party transactions shall require approval of the shareholders through special resolution and the related parties shall abstain from voting on such resolutions."

For private sector firms, there is no such relief though. Through an explanation, Sebi made the rule tougher than companies Act for private firms. In a July, the ministry of corporate affairs had clarified that only the particular entity which is party to the transaction should abstain from voting on that transaction. But, an explanation inserted on Monday, Sebi said, "For the purpose of clause 49(VII), all entities falling under the definition of related parties shall abstain from voting irrespective of whether the entity is a party to the particular transaction or not."

Let us apply this to the shareholders of ONGC. Under the original clause 49 announced in April, the Union government, which has 69 per cent stake in ONGC, would have had to sit out if the subsidy payout went to vote. Of the remaining 31 per cent, Indian Oil Corporation, one of the sister concerns receiving the subsidy, owned 7.69 per cent. Life Insurance Corporation (7.79 per cent) and GAIL (2.4 per cent) would also be disqualified, as these are under the control of the government.

That would have left the decision with the minority non-government investors, who held about 13 per cent. Some 610 foreign institutional investors which hold 6.92 per cent would have had a 53 per cent vote share and a veto on the subsidy resolution. With Monday's Sebi move, this has been averted.

As early as in March 2009, US investment bank Goldman Sachs said it had "serious" concerns about ONGC's corporate governance standards after these cash withdrawals spurred repeated objections from investors and independent directors. "Issues with corporate governance at ONGC are among the more serious for companies in our coverage universe," the bank had said.