Who’s to blame for the ONGC debacle?

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The Indian government’s auction of a 5% stake in ONGC (Oil and Natural Gas Corp) was its first attempt at privatization via an auction route. Based on various news reports the government was attempting to sell 42.77 Cr shares. The auction took place during market hours and offers for only 1.44 Cr shares had been received with 10 minutes left to the close of the trading session on Thursday (01/03/12). With the government panicking, state owned LIC (Life Insurance Corporation) stepped in at the last minute and purchased approximately 40 Cr shares. With a state owned entity purchasing the largest block shares can this transaction really be considered a privatization? Furthermore, there was no participation by foreign retail institutional investors and very little from retail investors. Although there have been a number of reasons put forth for the failure of the auction, the investment bankers managing the deal blamed the government for setting the minimum bid price too high at INR 290. The Investment bankers wanted to price the deal at INR 275. Although we can’t say with certainty that the deal would’ve been a success at INR 275, we can reasonably assume that we would have seen a higher level of investor participation. Fundamentally, markets will always clear at a price if not artificially manipulated. In this instance, clearly demand was weak because the shares were overpriced. The government should have listened to the investment bankers, who are paid hefty fees for their guidance, and priced the deal lower. Furthermore, the timing was off with the fiscal year-end approaching, many state-owned banks didn’t participate because they feared mark-to-market losses on their positions. The deal should have been postponed until after the current fiscal year-end. Alternatively, if the deal had been priced lower the banks could have been incentivized to participate based on the possibility of reporting mark to market gains by year-end. Ultimately, the government took the right steps in terms of privatization but failed in execution. Hopefully, the government will not be discouraged by the results but move forward and take heed of their investment bankers’ advice in the next auction.

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