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Institutional EYE

Commentary on Corporate Governance Issues

ONGC acquires HPCL: The perks of a PSU

Listing of public sector undertakings (PSUs) is cited as the biggest driver of accountability and transparency. But very often we find that there is a big divergence in standards applicable for PSUs and private companies. In ONGC’s case, the company is seeking regulatory exemptions. While IiAS supports the overall transaction, it believes that such leniency with regard to public votes are not warranted.

On 31 January 2018, Oil and Natural Gas Corporation of India Limited (ONGC) acquired a 51.1% equity stake in Hindustan Petroleum Corporation Limited (HPCL) from the Government of India (GoI) for a consideration of Rs.369.2 bn. The acquisition price of Rs.473.97 per share, represents a hefty 20% premium to the market price of HPCL as on that date.

As explained by ONGC in its shareholder notice, the purchase qualifies as a related party transaction (RPT) as defined under section 2(76) of the Companies Act 2013 (Act). Given that the consideration exceeds 10% of ONGC’s turnover, both the Act and SEBI (LODR) Regulations 2015 require the transaction to be approved by the minority shareholders.

ONGC’s move to therefore approach shareholders for consent is in line with the regulations. But the contents of the shareholder notice call for greater scrutiny:

1. Shareholders are being asked to ‘ratify’ the transaction

The acquisition was completed as an off-market transaction on 31 January 2018 and ONGC is now asking shareholders to ratify this deal. Section 188 of the Act states that ‘prior approval’ is required for companies to enter into RPTs. In cases where such an approval was not taken, the Act allows for ratification till a period of three months. This is understandable for routine transactions which are in the ordinary course of business. But given the legal and operational complexities in rolling back stake purchases, as a good governance measure, ONGC should have refrained from going ahead with the transaction before the shareholder vote.

As per the notice, the price was finalised on 20 January 2018. The company has stated that therefore seeking ‘prior approval was impracticable’. This is unfathomable, given that the purchase has been under consideration for several months and there was no real urgency to close the deal.

Questions to be asked:

  • Why could ONGC not wait for shareholder approval before purchasing the stake?

  • What happens if the resolution is defeated?

Does the company have a plan in place to roll back the transaction in case the resolution is defeated?

2. ONGC has received exemption from taking shareholder approval

Both the Act and SEBI (LODR) Regulations 2015 exempt public-sector undertakings (PSUs) from seeking shareholder approval, where the RPTs are conducted with another PSU. But, as highlighted by ONGC, there are no such exemptions for transactions between the Government and a PSU. Despite this, SEBI, vide its letter dated 30 November 2017, has already granted exemption to ONGC from having to take shareholder approval. ONGC has also applied to the Ministry of Corporate Affairs for an exemption – once granted the current resolution will be withdrawn.

IiAS believes this renders otiose the entire exercise. E-voting has already commenced from 26 February 2018. Discerning shareholders who have taken the time and effort to analyse and vote will be left in the lurch if the resolution were to be withdrawn.

Questions to be asked:

  • Should ONGC be given preferential treatment, and avoid the shareholder voting process?

In a previous note, IiAS had stated that PSU shareholders also have expectations regarding governance standards. However, the current legal framework fails to provide a level playing field. The Government is often able to push its agenda forward, which might not always be in the best interests of the company’s direct and immediate stakeholders.

ONGC is one such example. But there is a need for greater introspection across the board. In the listed space, there cannot be different standards for PSUs and private companies. It is time for the Government and regulators to bridge this governance gap.

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