The ONGC share auction could have bombed but for LIC coming to the rescue

A desperate seller unwilling to compromise on the product's price; a product that is plagued by a major shortcoming; buyers who are aware of both the seller's desperation and the expensive price of the product. What do you get when you combine all these? Answer: a debacle called ONGC disinvestment.

The details are murky but one fact is clear: the auction process for ONGC could have bombed on the government and but for LIC coming to its rescue, the Centre may have been left red-faced with the mortification of seeing its Maharatna's shares having no takers. The insurance major coughed up as much as Rs.12,000 crore of the Rs.12,767 crore raised from the auction, or 94 per cent.

It can never be proved conclusively whether LIC was ordered to bridge the large shortfall in demand. Circumstantial evidence, however, offers some pointers. Until 3.20 p.m. on the day of the auction, only 1.43 crore shares were bid for on the BSE and NSE. It is difficult to believe that bids for the balance 40.6 crore shares were made in the remaining 10 minutes before the offer closed at 3.30 p.m.

Second, the details of the bids were declared close to midnight on Thursday, eight hours after the auction closed. Why did it take so long for the bids to be tabulated? The auction was screen-based and the exchanges have efficient computer systems that have handled several big ticket initial public offerings (IPOs) in the past. So the explanation of glitches is not convincing and the exchanges have also clarified there were no technical problems.

Third, it is also difficult to believe that institutional investors putting in large bids will wait until the last 10 minutes of the auction. One explanation being given is that they were waiting for the indicative price to be declared by the exchanges. This did not happen because there were just 1.43 crore shares bid and the exchanges could not arrive at the indicative price from them. The fact is that all bidders, not just institutional, could see the trends live on the websites of the exchanges and were aware that the indicative price might not be announced. The question of indicative price arises only if there is excessive demand which was not the case with the ONGC auction.

The evidence, therefore, points in the direction of possible intervention by the government to save the auction. That institutions such as LIC and others have in the past been treated as handmaidens of the government only bolsters the case. It might well be that LIC will make handsome gains from the investment at some point in the future. Yet, that should not be confused with whether it is right for the government to lean on such institutions to bail it out of a tricky situation of its own making. The test question is: Would LIC have invested such a large sum in a single stock on its own volition?

Wrong on three counts

The government has only itself to blame for the debacle. It went wrong on three major counts: price, timing and the quality of the asset. The base price of Rs.290 set for the auction was way too high. The ONGC stock has a 52-week average high/low price of Rs.276 while the average price in the last month was Rs.289. The mistake was to price the share using the latter benchmark.

In a disinvestment or, for that matter, even in an IPO, it is always prudent to price the offer in such a way that there is something left on the table for investors. The government failed to do that with ONGC.

A discount on price was also important because the stock came loaded with risk not the least of which is the propensity of the government to make the upstream oil companies such as ONGC bear a greater share of the subsidy burden when oil prices rise, as they are doing now. ONGC was sharing a third of the subsidy on petrol and diesel but recently the government hiked it to a little over 37 per cent. With oil prices moving up further, there is no guarantee that this ratio will not be increased.

Finally, the timing was all wrong. For one, the market, despite the uptrend in indices in the last few weeks, is still nervous about the fundamental prospects for the economy. Growth is faltering and government finances are getting weaker with the fiscal deficit target for the entire year being overrun in just 10 months until January. This was no time to hit the market with a Rs.12,000 crore offer priced fully, if not excessively, and in a company subject to the overhang of subsidy-sharing.

Also, investors were aware of the government's desperation to bridge the fiscal deficit with proceeds from the auction, especially with barely a month left for the end of the financial year. What this means is that the seller, which is the government, began with a handicap and the only way of overcoming that was by pricing the product attractively. The government failed to do that.

It is important that lessons are learnt. The idea of an auction is itself a good one but it is important to time it correctly, generate excitement before the event and then set the price at an attractive level. Failing to do these will lead to debacles such as the ONGC disinvestment.