Sebi may exempt ONGC from making an open offer for HPCL shares

Photo: Reuters

Oil and Natural Gas Corporation's (ONGC's) proposed acquisition of a 51 per cent stake in Hindustan Petroleum Corporation (HPCL) is likely to get a relaxation under the Securities and Exchange Board of India's (Sebi's) Takeover Code Regulation.

According to the Takeover Code, any entity buying more than 25 per cent stake in a listed entity has to make an open offer to acquire additional 26 per cent from minority shareholder. Typically, ONGC's HPCL buy should trigger the open offer. However, the government, which controls both the entities, is likely to seek an exemption from Sebi arguing that the deal is a mere restructuring of shareholding and doesn't result in change of control, sources said.

ONGC is expected to soon make a formal application in this regard, said a source. Dinesh Sarraf, chairman, ONGC on Tuesday said it would not be required to make an open offer to buy HPCL's shares from the market.

"We haven't been approached yet for an open offer exemption. We will study the grounds on which the application is made and then decide," said a Sebi official, adding that the proposed transaction has grounds to seek an exemption.

The government on Tuesday had approved a plan wherein ONGC will buy its 51.1 per cent stake in HPCL. The final terms of the deal are yet to be finalised. At the current market rate, the government stake in HPCL is valued at around Rs 28,500 crore.

ONGC has surplus cash of just Rs 13,013 crore and investments worth over Rs 60,000 crore. Sources said ONGC will use its surplus cash and liquidate some of its investments for the HPCL buy.

The open offer exemption is critical for ONGC to keep the acquisition cost in check.

Legal experts ONGC will formally have to apply to Sebi for an exemption under the Substantial Acquisition and Substantial Takeover (SAST) regulations.

"If other ingredients are met, Regulation 10(1) (a) (iii) would afford an exemption. Sebi may also grant an exemption under Regulation 11(1) of the Takeover Code on grounds that there is no real change in control since both companies are government-owned and this is merely a restructuring of holding," said Somasekhar Sundaresan, independent counsel.

"This transaction appears to be a fit case to argue for open offer exemption. Sebi is generally empowered under the Takeover Code to grant exemption on a case to case basis from the open offer obligation in the interests of investors and the securities market," adds Vaibhav Kakkar, partner, Luthra & Luthra.

Legal experts say ONGC's acquisition price will have to be according to Sebi guidelines and might also need to obtain its minority shareholder nod for the HPCL stake buy.

"It will be interesting to see, if ONGC would be required to obtain approval of its shareholders for this transaction and whether the government will need to abstain from voting on account of this being viewed as a related party transaction," said Kakkar.

Getting minority shareholder nod won't be a challenge for ONGC, as state-owned entities, including Life Insurance Corporation (LIC), own more than 20 per cent stake in the oil explorer.

In the past, Sebi has provided Takeover Code relaxations to the government in a number of cases. Typically, the centre is exempted from making an open offer in while infusing fresh capital in public sector banks.

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