ONCG's FPO withdrawal: The real reasons?

After months of uncertainty over its proposed FPO sale offer, the state-run ONGC has withdrawn the papers filed with the market regulator SEBI. This puts an end to the govt.-proposed plan to disinvest Rs 12000 cr in the company in order to meet its planned target of Rs 15000 cr.

ONGC's Chairman and MD, Sudhir Vasudeva, has termed the withdrawal as a technical procedure and said that the company may file the papers again if so directed by the govt. In reality, however, the picture is quite different from what has been reported in the media.

We, at DSIJ, believe that the actual reason for the deferment of the FPO is the lack of interest shown by investors in such a bear market. If the FPO was to hit the market in such volatile and uncertain times, it would not attract investor fancy and would be a complete failure.

One look at the FIIs' net investments in equity says it all. According to data from the SEBI, FII investments currently stand at a negative Rs 291 cr for CY2011 as against a net inflow of Rs 133266 cr seen in Indian equities in CY2010. It is clear that the messiahs of the Indian markets would also shun the secondary sale offer, were it to happen now.

On the industry side, considering the events that have been transpiring in the oil & gas sector over the past few months, it is evident that the OMCs are set to report massive under-recoveries for this fiscal. As per estimates, the total figure of under-recoveries for the year is likely to touch Rs 121000 cr, as against Rs 78000 cr for last year.

With the govt. already facing heat over the fiscal deficit issue, we expect that the upstream majors would be directed to share a greater portion of the subsidy bill. This will seriously impact ONGC’s financial performance going forward. In fact, the company's management has also cautioned about a higher subsidy burden. This ad-hoc and uncertain climate looming over the oil & gas sector will further fuel investor apathy towards the share sale offer.

As far as the markets are concerned, investors have not taken very well to this withdrawal, and as a result have hammered the scrip by 3% to Rs 241.90. 

With companies like ONGC and steel giant SAIL deciding to defer their respective FPO offers, the govt. is under greater pressure now to address its disinvestment target issue and stay within its fiscal deficit targets.