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Reduction of government stake in oil companies a credit negative: Moody’s
The government’s latest plan to reduce stake in select state-run companies including oil and gas firms could be credit negative for Indian Oil Corporation (IOC), Bharat Petroleum (BPCL) and Oil India, Moody’s Investors Service said in a report.
“A reduction in the government’s direct stake to below 51 percent could result in a lower assessment of support incorporated into the rating of these companies, a credit negative. The Baa2 ratings of IOCL and BPCL incorporate two notches of uplift, while that of OIL incorporates one notch of uplift,” the report said.
According to the rating agency, a change in policy along with Rs 1.1 trillion disinvestment target indicate that the government’s direct ownership could fall below 51 percent in the state-owned oil companies – Oil and Natural Gas Corporation (ONGC), IOC, BPCL and Oil India, who had a market capitalization of Rs 4.5 trillion as on 5 July 2019.
The government is open to reducing its stake to as low as 40 percent, according to an Economic Times report. “The idea is to unlock the value in these firms. In the case of oil firms, their cross-holdings amongst each other give us that space,” an official told ET.
Analysts point out that reducing stake in state-owned oil and gas Public Sector Undertakings may leave less room for these companies to divest their cross-holdings.
“We highlight that as the government brings down its ‘effective’ stake in these companies to 51 percent gradually through disinvestments, the energy PSUs may not be able to divest their investment cross-holdings, as it becomes strategic for the government to retain a majority stake and control,” Kotak Institutional Equities said in a report.
It added that GAIL, IOC, Oil India and ONGC hold significant cross-holdings in each other, which may have to be held in the long run in case the government reduces its stake over the next few years.
Finance minister Nirmala Sitharaman had in her budget speech said the government was considering the option of taking its stake below 51 percent to an appropriate level on a case-by-case basis in companies that have to be retained under state control. She noted that the government has decided to modify the 51 percent government stake definition to include the holdings of state-controlled entities.
Also, in a post-budget interaction, Department of Investment and Public Asset Management secretary Atanu Chakraborty had said the government had made the separation between control and 51 percent stake for the first time.
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