Tyranny of the Dominant Shareholder: Hobson's Choice Before ONGC Board

Abstract

The case describes a situation where the government as the dominant majority shareholder in a listed Public Sector Enterprise (PSE) directs it through its executive Chairman (a government selected executive) to buy a part of government's stakes in another listed PSE, in which also the government is a majority shareholder. The Chairman is summoned for a meeting in the governing ministry and ‘persuaded’ to agree to the proposal, without the proposal having been discussed in the company's board. Being a government appointed employee, the Chairman faces the difficult task of putting the matter for discussion in the board while informing the board that he had already agreed to the proposal. The case describes the events that preceded the board meeting to discuss the proposal. The board faces the unpleasant task of dealing with the Chairman's lapse in not taking the board into confidence prior to his agreement conveyed at the ministry meeting. A bigger difficulty was the possibility that the proposal was not desirable from ONGC's point of view. How will the board then convey the decision to the government? What levers does the board have to deal with the matter?

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

You are not authorized to view Teaching Notes. Please contact your librarian for instructor access or sign in to your existing instructor profile.

Resources

Exhibit 1: Disinvestment Compulsions – Background

The GDP growth rate for India had been faltering over the last several years. Though the expectation of growth rate for 2013-14 in the economic survey was between 6.1 and 6.7%, by December 2013, it had become apparent that this number would likely be below 5%. In addition, despite excellent monsoon, the economy continued to be negatively impacted by stubbornly high inflation rates. In the budget for 2013-14, the Finance Minister (FM) had proposed to keep the fiscal deficit at below 4.8% of GDP. The poor performance of the economy, coupled with the inability of the government to control subsidies due to the proximity of general elections, was putting enormous strain on the government's resources. As criticism mounted on the way the government had been managing the economy, the FM had become more and more determined to hold the fiscal deficit at below what he dubbed ‘the red line’ of 4.8% of GDP.

The FM had budgeted receipt of ` 40,000 crore from divestment of government stakes in central Public Sector Undertakings (PSUs) for 2013-14. Divestment in India had always been a tortuous, political process, requiring a myriad of clearances and opposition from unexpected and unconnected quarters. In addition to clearance by the Ministry of Disinvestment (MoD) and Ministry of Finance (MoF), clearance from the parent ministry of the PSU where disinvestment was contemplated was required. In case the parent ministry disagreed with the proposal, the matter needed clearance from the cabinet. Sometimes, the Law Ministry got involved in the process to clarify issues raised on the legality of specific divestment proposals. Employee unions of PSUs, instigated by political parties to which they were affiliated, also were generally opposed to divestment. The unions were prone to using the protest to bargain for compensation related concessions from the government.

By the middle of the fiscal year, the progress on the disinvestment front had been tardy: PTI reported on October 18, 2013, that against a target of ` 40,000 crore the government had raised just ` 1,400 crore. In his meeting with IMF in Washington, the FM reportedly said, “We shall not allow the (fiscal deficit) red line to be breached.” The FM was also concerned about the dividends from the PSUs. Against receipt of ` 55,443 crore as dividend for fiscal 2012-13, the budgeted number for fiscal 2013-14 was ` 73,866 crore. PSUs were pressured to distribute larger dividends despite their poor financial performance.

Partial Disinvestment in Coal India Ltd. (CIL)

The push for disinvestment began in earnest in the third quarter of fiscal 2013-14, with the government deciding to divest 5% (pared down from the original 10% due to opposition from the workers’ union) from its 90% stake in Coal Indian Limited (CIL). The divestment would have raised about ` 20,000 crore. However, by the time the road shows were completed for the sale, road blocks had been created by the coal workers’ union. The union was opposed to any dilution of government stakes in CIL and threatened to go on strike if the government went ahead with divestment. After a meeting between the Prime Minister and representatives of the union, in the second week of December 2013, the government decided to call off the sale.

After that the government considered two other options of raising resources from CIL by dipping into the cash of over ` 60,000 crore held by the company. One was asking the company to buy back 10% of the outstanding equity and the other was to ask the company to pay a hefty dividend.

After deliberations within the government, the Ministry of Coal asked CIL to declare a hefty interim dividend to be paid in fiscal 2013-14. The board of CIL met on December 16 and duly obliged by declaring an interim dividend of ` 29 per share. This resulted in inflow of ` 16,485 crore into the government kitty. The government also benefitted from the dividend distribution tax (levied at the rate of 15% plus surcharge of 9%) paid by CIL on the dividend distributed. The dividend was more than double the dividend of ` 14 per share that had been paid by CIL for fiscal 2012-13.

As an aside, the quantum of dividend declared by CIL created a major controversy. As per the stock exchange rules, no adjustment in the futures price of a stock was made, when the stock became ex-dividend, if the dividend was less than 10% of the last traded price of the stock. Futures prices were generally not impacted by a stock becoming ex-dividend in the cash market since dividend yield of 10% or more was very rare. The CIL stock had closed at a price of ` 289.15 per share on December 15, 2013. The decision of the board to declare a dividend of ` 29 per share (an odd number by itself) meant a huge windfall gain of the same amount to all who held long position in the stock in the futures market. Was the board of CIL unaware of the implication in the market of declaring ` 29 per share as dividend? Should the board not have sought advice on implication of such high dividend on market prices in the cash and the futures markets? Did the board initially contemplate a lower figure and was it prodded towards ` 29 by vested interests in the board? Who benefitted from the decision, by taking appropriate position in the futures market? There was no further reporting on the matter after the initial adverse reports. Very likely, vested interests ensured that the report did not gain currency!

Partial Disinvestment in IOC

The other company that would come to the rescue of the government was IOC. However, its parent ministry, the Ministry of Petroleum and Natural Gas (MoPNG) was opposed to the proposal sponsored by MoF to divest government stakes in IOC. The reason was the depressed price of IOC shares. After touching a peak price of ` 375 on January 18, 2013 the price of IOC shares had shown a secular decline. After touching a low of about ` 188, the share price had hovered around ` 200. The ministry felt that the market cap of about ` 50,000 crore for IOC was well below the intrinsic value of the company. IOC's 7.69% equity stakes in ONGC, at price of ` 300 per share itself was valued at about ` 20,000 crore.

The stiff opposition from MoPNG meant that MoF required some other mechanism for divestment of government stake in IOC. In a meeting on January 9, 2014 of the Empowered Group of Ministers (EGoM), chaired by the FM, the view of MoPNG was accepted and an in principle decision was taken to ask upstream oil companies, ONGC and OIL India to buy 5% each from the government's stake in IOC. On January 16, another meeting of EGoM confirmed the decision to ask the upstream companies to buy 10% from the government's stake in IOC. The meeting also specified that the transaction should be done through a block deal in the market. A communication to that effect was sent to MoPNG based on which, MoPNG wrote to the ONGC Chairman conveying the decision of the government to sell a 5% stake in IOC to ONGC through a block deal, and asking that the matter be placed before the ONGC board for its decision.

Exhibit 2: Pattern of Shareholding in IOC as on December 31, 2013

Total number of shares outstanding: 2427,952,482

  • President of India: 78.92%
  • ONGC: 8.77%
  • Life Insurance Corporation of India: 2.86%
  • IOC Trust: 2.40%

The balance was held by institutions and individuals.

Source: Company website

Exhibit 3: Pattern of Shareholding in ONGC as on December 31, 2013

Total number of shares outstanding: 8555,490,120

  • President of India: 69.23%
  • IOC: 7.69%
  • Life Insurance Corporation of India: 7.69%
  • GAIL: 2.40%

The balance was held by institutions and individuals.

Source: Company website

Exhibit 4: IOC and its Performance at a Glance

About IOC

Established in June 1959, Indian Oil Corporation Limited is a Maharatna 1 company in the Indian State Owned Enterprises (SOE) sector. Its business interests straddled the entire hydrocarbon value chain – from exploration for crude oil and gas, refining, production of petrochemical products, to transportation, distribution and marketing of petroleum products, petrochemical products and natural gas. It is a leading Indian corporation in the Fortune ‘Global 500’ listing, ranked at 88 in 2013. The corporate vision of IOC is to be the Energy of India.

Financial Results

(in Crore)

Year >>>>>>

2012-13

2011-12

2010-11

2009-10

2008-09

Financials

Turnover (with excise duty)

414909

373926

303695

250065

261849

EBITDA

17258

21919

16316

18859

11163

EBIT

12057

17052

11769

15632

8281

PBT

5648

3754

9096

14106

4329

PAT

5005

3955

7445

10221

2950

What Corporation Owns

Gross Fixed Assets

104840

99183

93137

72089

62345

Depreciation & Amortisation

44207

39336

34950

30508

27567

Net Fixed Assets

60633

59847

58187

41581

34778

Capital Work in Progress

27564

21770

12620

21227

18114

Investments

18671

18678

19545

22370

32232

Working Capital

40646

38251

24036

14679

9287

Miscellaneous Expenditure

17

20

15

18

38

TOTAL

147531

138566

114403

99875

94449

What Corporation Owes

Share Capital (` 10 paid-up/share)

2428

2428

2428

2428

1192

Share Suspense Account

0

0

0

0

22

Reserves

58696

55449

52904

48125

42784

TOTAL

61124

57877

55332

50553

43998

Borrowings

80894

75447

52734

44566

44972

Deferred Tax Liability

5512

5242

6337

4756

5474

FX Translation Difference

0

0

0

0

5

TOTAL

147530

138566

114403

99875

94449

Source: Company website

Notes

1. vi. A term, roughly translated as a Great Jewel, denoting the highest category among the companies in the Indian public sector.

Exhibit 5: Rules Governing Bulk / Block Deals

1. Circular on Bulk Deals

Deputy General Manager

Market Regulation Department

E-mail: sundaresanvs@sebi.gov.in

SEBI/MRD/SE/Cir-7/2004

January 14, 2004

The Executive Directors / Managing Directors / Administrators

Of All Stock Exchanges

Dear Sir / Madam,

Sub: Disclosure of trade details of bulk deals

  • With a view to imparting transparency in bulk deals so as to prevent rumours/speculation about such deals causing volatility in the scrip price, it has been decided to bring about greater disclosure of such deals as mentioned below:
  • The disclosure shall be made with respect to all transactions in a scrip where total quantity of shares bought/sold is more that 0.5% of the number of equity shares of the company listed on the stock exchange.
  • The brokers shall disclose to the stock exchange the name of the scrip, name of the client, quantity of shares bought/sold and the traded price.
  • The disclosure shall be made by the brokers immediately upon execution of the trade.
  • The Stock exchanges shall disseminate the aforesaid information on the same day after market hours to the general public.
2. Circular on Block Deals

General Manager

Market Regulation Department - Policy

E-mail: sundaresanvs@sebi.gov.in

SEBI/MRD/SE/Cir-19/05

September 2, 2005

The Executive Directors / Managing Directors / Administrators

Of All Stock Exchanges

Dear Sir / Madam,

Sub: Guidelines for execution of block deals on the stock exchanges

  • SEBI had issued a circular (reference no. SEBI/MRD/SE/Cir-7/2004) on January 14, 2004 on disclosure of details of “bulk” deals with a view to impart greater transparency to the market on such transactions executed on the stock exchanges. In terms of paragraph 1.1 of that circular, a “bulk” deal constituted of “all transactions in a scrip (of an exchange) where total quantity of shares bought/sold is more that 0.5% of the number of equity shares of the company listed on the exchange”. Thus the quantitative limit of 0.5% could be reached through one or more transactions executed during the day in the normal market segment.
  • There is however a felt need of the market to execute large trades through a single transaction easily without putting either the buyer or the seller in a disadvantageous position. In order to facilitate execution of such large trades, the stock exchanges are being permitted to provide a separate trading window. A trade, with minimum quantity of 500,000 shares or minimum value of Rs. 5 crore executed through a single transaction on this separate window of the stock exchange would constitute a “block deal” as distinguished from “bulk” deal defined earlier.
  • A block deal would be subject to the following conditions:
    • The said trading window may be kept open for a limited period of 35 minutes from the beginning of trading hours i.e. the trading window shall remain open from 9:55 a.m. to 10:30 a.m.
    • The orders may be placed in this window at a price not exceeding ±1% from the ruling market price/previous day closing price, as applicable.
    • An order may be placed for a minimum quantity of 500,000 shares or minimum value of Rs. 5 crore.
    • Every trade executed in this window must result in delivery and shall not be squared off or reversed.
    • The stock exchanges shall disseminate the information on the block deals such as the name of the scrip, name of the client, quantity of shares bought/sold, traded price, etc to the general public on the same day, after the market hours.

There is no change in regard to the disclosure of trade details of “bulk deals” as specified in the earlier SEBI circular no. SEBI/MRD/SE/Cir – 7/2004 dated January 14, 2004.

The Stock exchanges shall disseminate the aforesaid information on the same day after market hours to the general public.

Source: SEBI

Exhibit 6: Market Data on IOC Shares and NIFTY

Date

Day

IOC Share Price (`)

# IOC Shares Traded

NIFTY

% Change IOC shares

% Change in NIFTY

8.1.14

Wednesday

195.50

1240000

6174.60

9.1.14

Thursday

198.85

1024000

6168.35

1.714%

-0.101%

10.1.14

Friday

200.70

874000

6171.45

0.930%

0.050%

13.1.14

Monday

207.35

778500

6272.75

3.313%

1.641%

14.1.14

Tuesday

206.10

416400

6241.85

−0.603%

−0.493%

15.1.14

Wednesday

209.55

390200

6320.90

1.674%

1.266%

16.1.14

Thursday

212.25

485600

6318.90

1.288%

−0.032%

17.1.14

Friday

225.10

3298300

6261.65

6.054%

−0.906%

20.1.14

Monday

224.75

884300

6303.95

−0.155%

0.676%

21.1.14

Tuesday

225.10

377400

6313.80

0.156%

0.156%

22.1.14

Wednesday

228.75

381100

6338.95

1.622%

0.398%

23.1.14

Thursday

227.95

464500

6345.65

−0.350%

0.106%

24.1.14

Friday

227.85

334300

6266.75

−0.044%

−1.243%

27.1.14

Monday

223.60

412800

6135.85

−1.865%

−2.089%

28.1.14

Tuesday

223.70

313300

6126.25

0.045%

−0.156%

29.1.14

Wednesday

235.60

1286600

6120.25

5.320%

−0.098%

30.1.14

Thursday

246.40

1263000

6073.70

4.584%

−0.761%

31.1.14

Friday

245.35

841300

6089.50

−0.426%

0.260%

3.2.14

Monday

246.40

479600

6001.80

0.428%

−1.440%

4.2.14

Tuesday

246.45

327600

6000.90

0.020%

−0.015%

5.2.14

Wednesday

238.10

366900

6022.40

−3.388%

0.358%

6.2.14

Thursday

246.40

374600

6036.30

3.486%

0.231%

7.2.14

Friday

246.05

387000

6063.20

−0.142%

0.446%

Source: NSE

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

locked icon

Sign in to access this content

Get a 30 day FREE TRIAL

  • Watch videos from a variety of sources bringing classroom topics to life
  • Read modern, diverse business cases
  • Explore hundreds of books and reference titles