R S Sharma, Former Chairman and Managing Director, ONGC

A seller would like to have best possible price for selling a commodity and the same principle applies to stake sale planned by the Govt. as well. In the instant case also the Govt. was targeting as best a price as they could by offloading their five percent stake in the company. Also, we all saw that there was lot of activity in ONGC's stock leading upto stake sale. It leads one to believe that there was deliberate effort to push up ONGC share prices leading upto IPO. Sentiments such as these got validated with media reports claiming that LIC was very active prior the Govt, stake sale in buying the shares in the market to ensure that sentiment on share prices remained high.

Firstly, overhang of sale of equity proved to be detrimental because five percent equity in absolute terms turns out to be very high in case of high market cap company like ONGC.

Secondly, keeping floor price higher than the price at which the shares were trading preceding the launch of sale was a strategic mistake. This defied logic and did not conform to global practices. The level at which you set the floor price does not necessarily mean that you have to sell at that price. In fact, based on the appetite and assessment anybody can bid at higher price than the floor price. Keeping floor price high was a strategic error because unlike an FPO it was an auction process.

I was Chief Financial Officer of ONGC when we came out with an IPO in March 2004, and from that experience I can say that the success of stake sale of any equity would depend on the price at which it gets traded after the stake sale. I am unable to figure out what would have been the logic behind keeping the floor price higher than the previous day closing price. To my mind this was not correct and did not conform to the global practices.

Incidentally, the day the auction opened I was in Singapore. Talking to Foreign Institutional Investors (FIIs) I realised that everyone out there had an impression that ONGC sale stake was stage managed. Perhaps that is the reason why FIIs kept away from the auction. The widespread impression amongst investors was that government seemed to have already identified and got committed buyers at that price. So, why should anybody else show interest in ONGC stake sale?

Having served on board of the company for nine years and serving more than half of that period as its Chairman - I felt pained at allegations hurled at ONGC. A front page report by leading newspaper The Indian Express called ONGC share sale a fraud. I felt hurt reading it but sadly one couldn't find fallacy with that assessment.

The report claimed that LIC picked up majority of the stake in ONGC and within a matter of time LIC was made poorer by Rs 1,100 crore. LIC has lost money in crores and it is not government money, it is policyholders' hard earned money. No individual or entity has a right to incur a loss to support government strategy. So, the shareholders have a right to ask why LIC bid at such a high price. I'm sure these issues are going to come up sooner or later and need to be addressed adequately.

Now look at the bigger picture. Had this issue sailed through smoothly, the government would have been in a strong position to make further disinvestments through auction route in various other PSE entities. So, at whatever level ONGC share pricing got decided, I would not be able to justify the decision.

The way cess was increased in the budget cannot be seen as a prudent move. I'm saying this in the backdrop of the fact that the ONGC stake sale was pushed through just before the budget. Ethically this was not the right way to move forward on cess issue. Investors have been let down on this score because decision of raising cess would have been finalised well in time before the ONGC auction. Following the budget announcement indicating increase in oil cess - sentiment around ONGC turned completely negative. This resulted in steep fall in ONGC share price.

Thus, carrying out share sale just couple of days before hiking oil cess was not correct. It should have been disclosed. The issue that comes up for discussion is one of transparency. This is especially so in case of minority shareholders in a listed company who take a call on the crude oil prices, and take a call on the company's bottom line. In case of an upside they have every right to enjoy benefit from the resultant upside. And now look at the other scenario. If crude prices crash, will the government come to support those minority shareholders? The answer is no. In such a situation, what we are implying is that shareholders investing in the company surrender the upsides that rightly belong to them without any comfort that somebody would come forward to share their downside as well.

On the positive side, no one can question the government's right to raise the cess because to my mind cess of `Rs 2,500 per tonne got fixed almost four to five years back. During the intervening period crude prices itself have increased quite steeply. So, in principle raising the cess is justified. But here again what comes up for questioning is issue of governance. A sudden steep increase of cess to the extent of 80 percent cannot be viewed as the right step. The increase itself should have been staggered over the years.

As Chairman, ONGC, I had made submissions to the government in the past that as far as cess on oil is concerned - instead of making it absolute amount, it should be made ad-valorem. To make such decision, the government is required to make relevant amendment Oil Industry Development Board (OIDB) Act.

I would not buy this statement. This is so because ONGC until March 2002 was operating under administered pricing mechanism which governed sale of its products including oil as well as gas. Product pricing followed cost plus mechanism. So, whatever used to be the cost of the company product it used to get a mark up on that for oil as well as gas. And the product pricing used to get settled on that.

When oil and petroleum prices got deregulated in April that year - crude prices at the time had moved upto US$22/barrel (bbl). Earlier we also experienced crude prices going upto US$27-28/ bbl. And there were also lows with crude prices going down as low as US$10/bbl in the year 1999. At the time of deregulation crude prices were averaging around US$22/bbl and at that time it was thought that this was the price at which one could deregulate oil and petroleum product prices. However, as our experience showed the prices of crude since then have been constantly moving up. So, ONGC and Oil India have been beneficiaries of the windfall gain with oil prices going up. The reason why I'm calling it a windfall gain is because the oil production in these companies is coming from the blocks which were awarded on nomination basis. Another reason being that in nominated blocks there is no production sharing arrangement. So, in a PSC regime, whatever the upside or downside it gets shared between the government and the companies involved.

In the absence of production sharing arrangement, options before the government was either to place all these blocks (following deregulation) under the PSC regime or to collect that upside in some other manner. But when I say, in some other manner, again, the government's right to collect that upside in the form of either windfall gain tax, higher cess or higher royalty or any other mechanism exists. The only issue here is that in actual practice this gets collected in a purely ad hoc manner, on quarter to quarter basis. The upside gets shared in the form of subsidy discounts to be given to the OMCs.

I don't see this practice getting discontinued at any point of time in near future. But in case a sincere effort is made to address the issue we can put up a mechanism which takes care of underrecoveries.

ONGC continues to make the discoveries, albeit on a much smaller scale. But it is true that ONGC's reserve replacement ratio for the past five to six years has been constantly more than one. However, it is also a fact that ONGC has not made any major discovery in the last two and half decades. The last major discovery for ONGC had come in mid 1980s in Gandhar field in Gujarat.

In deep waters we have discoveries in KG basin and Mahanadi. With deep waters discoveries one has to see as to what are the returns one is getting against high investment that one is making in them. Most of these are gas discoveries and there has to be a reasonable price for ONGC to get a comfort that these make for viable investments. And it's only then that the board would approve the investments.

I feel the government should seriously send out a strong message to established global players to come and invest in India. This message has to be in terms of attractive fiscal regime for the upstream activities.

I myself feel that the current climate does not inspire enough confidence in foreign investors to come and invest in the country. But I do not agree with the statement that there was any arm twisting as far as Cairn-Vedanta deal is concerned. It's an issue of legality. With the legal interpretation of a signed contract, there are two issues - one is the policy intent and the second is the legally binding contract. The intent in the pre-NELP regime when the blocks were allotted to the private companies had been that the National Oil Companies - Oil India and ONGC - will be made the licensees and other companies would be exempted from payment of any cess or royalty. In some of pre-NELP blocks, including Barmer block, the PSCs did not explicitly provide for the policy intent. But, once the contract is signed, it is presumed that the parties have read the clauses of the contract. As per the signed contract it is silent as to which party would be paying the cess.

I wouldn't put the blame for delay in the Cairn-Vedanta deal on the government, instead I find fault lay with Cairn Plc. They should have kept their shareholders well informed about the risk factors, about lack of clarity in the contract. The dispute had already been there and letters had been exchanged in an attempt to settle the dispute between the government and ONGC and Cairn. The thing is that lack of unanimity came into the public domain after the deal got announced.

Whatever the viewpoint taken by ONGC, as long as operations were continuing there was a comfort that adjustments would come in due course of time. But when one of the parties was exiting, they were selling their stakes, then the new party would say whatever the understanding the entity which is exiting with the seller is going out with the seller and they should accept this. So, the issue got precipitated at this point of time. Rather than the dispute itself, the lack of clarity relating to contract was not adequately disclosed by Cairn Plc in the public domain.

Under the current mandate given to OVL - the company is doing encouragingly well while pursuing overseas energy assets. I do not find any fault with OVL's current philosophy of going after economically viable overseas assets. Again if you have a scenario where the mandate for acquiring overseas assets is guided by factors other than the commercial mandate, then it is difficult to compete with such players.