ONGC & Oil India may acquire government’s stake in IOC for $812mn…

Oil & Natural Gas Corp, India’s biggest explorer, and Oil India may buy part of the government’s stake in Indian Oil Corp for as much as Rs50bn ($812mn), helping narrow the budget deficit.

The state-run explorers will probably purchase 10% of the oil refiner through block deals in the stock market within a week, Oil Secretary Vivek Rae said in New Delhi yesterday after a meeting of a ministers’ panel. The government holds 78.9% in Indian Oil, while ONGC owns 8.77%.

The finance ministry is demanding higher dividends from state companies and selling shares as it seeks to narrow the fiscal deficit and prevent a sovereign credit-rating downgrade to junk. The government expects to raise less than half of its target of Rs400bn from share sales in the year to March 31. The ministers’ panel last week deferred a decision to sell Indian Oil shares to the public because they are undervalued, Rae said yesterday.

“The government’s using its own companies and doing all it can to meet its budget deficit target,” Gagan Dixit, a Mumbai-based energy analyst at Quant Broking Pvt., said by phone. “Indian Oil’s shares have more value and the potential to rise and ONGC and Oil India can benefit by selling these later.”

Indian Oil gained 1.3% to Rs212.25 at the close in Mumbai yesterday. The shares have dropped 0.9% this year, extending a 21% decline last year. ONGC declined 1.7% to Rs286.95 and Oil India fell 0.8% to Rs476.05.

The money raised from the sale will go entirely to the government. Finance Minister Palaniappan Chidambaram reiterated on January 15 he will achieve his target of narrowing the fiscal deficit to a six-year low of 4.8% this financial year and reducing it by 0.6% every year after that. The shortfall in the eight months through November reached 94% of the full-year target of Rs5.4tn.

The government will pare its budget deficit to below this year’s target after curbing spending, according to two Finance Ministry officials with direct knowledge of the matter.

India’s credit rating may be cut to junk in 2014 unless the general election due by May leads to a government capable of reviving economic growth, Standard & Poor’s said in November. The rating is currently at the lowest investment grade.

Indian Oil sells diesel, kerosene and cooking gas below the cost of production to curb inflation. The refiner is partly compensated for the losses with cash from the government and discounts on the sale of crude by producers including ONGC and Oil India. The government’s subsidy payments are often delayed resulting in the company reporting losses and higher debt.

Indian Oil’s profit dropped 82% to Rs16.8bn in the quarter ended September 30. In the three months ended June 30, 2012, it reported a loss of Rs224.5bn, the highest by a company in India.

ONGC had Rs195.6bn of cash and equivalents and Oil India Rs124.9bn as of September 30, according to data compiled by Bloomberg. The discounts the two explorers give on their crude oil sales to state-run refiners are reducing their cash flows.

ONGC’s cash from operations dropped to a three-year low of Rs362bn last financial year, according to data compiled by Bloomberg.

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