HPCL-ONGC merger: When corporate governance takes a back seat

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Five months into the merger of HPCL with ONGC, the government is still struggling with the composition of the boards of the two companies.

There is an ONGC officer who sits on the board of HPCL, a company it has bought for Rs 369.15 billion from the central government, but the government has no common representative in the boards of the two companies.

This has resulted in a peculiar mash-up of corporate governance practices. 

Instead, the Government of India has a joint secretary-level officer on the 13-member HPCL board and has two officers as part-time nominee directors for the nine-member ONGC board. Of the two on the ONGC board, one is a joint secretary; the other is of the rank of additional secretary.

Also, the chairmen of the two companies do not sit on each other’s board. As per the terms of the merger announced in January, the full complement of the board of HPCL, including its chairman and managing director, would retain their positions despite becoming part of the ONGC group, thus, retaining its “distinct identity and brand value”.

Now imagine a conversation between the three government officers posted to these boards on any issue that affects both companies simultaneously.

None of these officers would have a complete picture of the issues involved unless one of them decides to spill the details of what has happened in the respective board meetings they have attended.

Only through such violation of corporate governance practices can these officers, and by extension, the rest of the board, become privy to the entire range of issues that would affect the “group company”. 

Yet the merger between the two oil companies was supposed to have created an “innovative vertical integration that will help (in) leveraging the strength of both the companies”. But with such dissonance among a wide range of board members, this seems impossible. 

It is understood that Petroleum Minister Dharmendra Pradhan has given his consent for correcting the situation. Instead of posting three government officers to the two boards, he is leant to have approved the appointment of a common additional secretary-level officer to the two boards. It has not been notified, though this seems the most practical step. It has possibly got held up because of the usual fratricidal wars between the employees of the two companies. 

Announcing the merger in January this year, Pradhan had said: “Through this acquisition, ONGC will become India’s first vertically integrated ‘oil major’ company, having a presence across the entire value chain. The group company will have an advantage of having enhanced capacity to bear the higher risk, take higher investment decisions and improve business”. It had seemed and still seems a reason to cheer. 

But as the earlier experience of the government in organising the merger of Air India with Indian Airlines showed setting up of good corporate governance practices has been difficult to envisage for the different ministries. 

A rare exception to this rule was provided by the experience of the merger of the five associate State Banks into the State Bank of India on March 31, 2017.

The chairmen of these banks were re-designated as managing directors and the boards of each of the five were absorbed into one entity. The results of adopting smart corporate governance have started showing at the junior levels too with hardly any murmur of dissent. 

Yet just as in the case of the merger of the two state-owned airlines or of the SBI merger, the stakes here are equally massive. The integration of ONGC-HPCL offers huge potential to attain economies of scale at various levels of operations in the upstream oil exploration sector and downstream oil marketing business.

But for that to happen, as an independent board member in one of the two companies noted, the government must sort out the confusion of appointing its own officers to the two boards.