The government is likely to acquire a large share in HPCL following the preferred issue

31 Jul 2023 , 11:06 AM

Five years after exiting the oil marketing company, the Indian government is planning to acquire a major share in Hindustan Petroleum Corporation Ltd (HPCL). The government has aside Rs 30,000 crore in this year’s budget for capital assistance to oil marketing corporations. 

According to news reports, Indian Oil and BPCL have already approved rights issues, while HPCL has been instructed to make a preferred share distribution to the government. The method of mass issuance of new shares to a certain set of investors is known as a preferential issue.

The government sold its whole 51.11% share in HPCL to oil and gas explorer Oil and Natural Gas Corporation (ONGC) in 2018 for Rs 36,915 crore. Despite the fact that the acquisition was part of the government’s strategic divestment initiative, the government retains the indirect influence of HPCL via state-owned ONGC. The government continues to choose all directors on the HPCL board, and the firm remains administratively controlled by the oil ministry.

The IOC board approved raising up to Rs 22,000 crore this month by inviting existing shareholders to purchase additional new shares in the company (this type of issue grants existing shareholders securities known as rights), while the BPCL board approved raising up to Rs 18,000 crore through a rights issue.

If all existing IOC shareholders exercise their rights under the rights issue, the government will pay Rs 11,330 crore for their 51.5% ownership in the business. Similarly, the government may wind up paying around Rs 9,530 crore for its 52.98% stake in BPCL, they added. This would leave the government with anything between Rs 9,000 and Rs 10,000 crore out of the Rs 30,000 crore earmarked in the budget for the preferred HPCL offer. This would be a considerable stake given HPCL’s current market value of Rs 39,650 crore.

Despite falling oil prices, the current gasoline price freeze has persisted, allowing the merchant to make up for some of its past losses. According to Fitch Ratings, recent announcements by Bharat Petroleum Corporation Limited (BPCL) and Indian Oil Corporation Ltd (IOC) of plans to raise equity capital could boost their capex spending and the credibility of their emission-reduction goals.

‘India’s third major OMC, Hindustan Petroleum Corporation Limited (HPCL), has not yet announced similar proposals,’ the rating agency said in a note.

Overall, Fitch Ratings expects India’s petroleum product demand to grow by the mid-single digits in the medium term, underpinned by our prediction of 6%-7% GDP growth in the next several years, increased government infrastructure spending, and a pick-up in industrial activity.

Fitch anticipates the marketing division of Indian oil marketing businesses to become profitable in the fiscal year ending March 2024 (FY24) as crude oil prices fall to its estimate of $78.8 per barrel, following huge losses in FY23 due to high crude prices and unchanged retail fuel prices.

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