ONGC gets cabinet nod for acquiring 51% govt stake In HPCL

State-run oil explorer Oil and Natural Gas Corporation Ltd. (ONGC) is expanding its forward linkage with a buy-out government's entire stake in refining and oil marketing company Hindustan Petroleum Corporation Ltd. (HPCL).

The union cabinet has given an in-principle nod for the merger, which would create an oil giant with both backward and forward linkages. A well integrated oil company would be in a better position to compete with global oil majors in overseas asset acquisitions.

The union cabinet is reported to have given its in-principle approval to sell 51 per cent stake in HPCL to ONGC.

A Bloomberg report citing a senior government official said the deal will be exempted from the mandatory open offer that is to be made under the takeover code when selling more than 26 per cent stake.

The stake sale is expected to be completed in one year.

The government currently owns 68.07 per cent in ONGC, and the acquisition will make HPCL a step-down subsidiary of ONGC.

Government of India owns nearly 51.11 per cent stake in HPCL, and buying out the same would cost ONGC more than Rs29,000 crore, based on Wednesday's closing price.

While this will help the government rake in part of the divestment proceeding planned for the fiscal, it will be a strain on ONGC as the buyout will exhaust its cash balances.

For the financial year ended 31 March 2017, ONGC had cash and cash equivalent of Rs16,648 crore and a total debt of Rs55,682 crore. Buying out this stake would mean adding more debt.

However, ONGC is reported to be looking to sell its 13.8 per cent stake in Indian Oil Corporation Ltd, valued at more than Rs25,000 crore, to finance the buyout. But, this will impact IOC's share price.

The buy-out will add HPCL's 15.8 million tonnes of annual crude refining capacity to ONGC's portfolio. ONGC also owns a majority stake in Mangalore Refineries & Petrochemicals Ltd, which operates a 15 million-ton-a-year refinery in Mangalore, Karnataka.