ONGC-HPCL deal: Proxy advisory firm questions exemptions

Proxy advisory firm IiAS has questioned state-owned ONGC seeking exemption from taking shareholders' nod for acquisition of the government's stake in HPCL, saying such leniency with regard to public votes is not warranted. Oil and Natural Gas Corp (ONGC) bought the government's 51.11 per cent stake in Hindustan Petroleum Corp Ltd (HPCL) for Rs 36,916 crore.

The acquisition price of Rs 473.97 per share was finalised on January 20 and the deal was completed as an off-market transaction on January 31 and ONGC is now asking shareholders to ratify it, IiAS said. The purchase qualifies as a related party transaction (RPT) as the government holds majority stake in ONGC and was selling its stake in HPCL.

IiAS said Section 188 of the Companies Act states that 'prior approval' is required for firms to enter into RPTs. In cases where such an approval was not taken, the Act allows for ratification till a period of three months. "This is understandable for routine transactions which are in the ordinary course of business. But given the legal and operational complexities in rolling back stake purchases, as a good governance measure, ONGC should have refrained from going ahead with the transaction before the shareholder vote," it said in a note.

On the company's assertion in the shareholder notice that seeking prior approval for a price sensitive deal was impracticable, it said, "This is unfathomable, given that the purchase has been under consideration for several months and there was no real urgency to close the deal." "Questions to be asked: Why could ONGC not wait for shareholder approval before purchasing the stake? What happens if the resolution is defeated? Does the company have a plan in place to roll back the transaction in case the resolution is defeated?," it asked.
Both the Companies Act and SEBI (LODR) Regulations 2015 exempt public-sector undertakings from seeking shareholder approval where the RPTs are conducted with another PSU. But there are no such exemptions for transactions between the government and a PSU.

"Despite this, SEBI, vide its letter dated November 30, 2017, has already granted exemption to ONGC from having to take shareholder approval. ONGC has also applied to the Ministry of Corporate Affairs for an exemption ? once granted the current resolution (seeking shareholder nod) will be withdrawn. IiAS believes this renders otiose the entire exercise," the note said. IiAS said discerning shareholders who have taken the time and effort to analyse and vote will be left in the lurch if the resolution were to be withdrawn.
It went on to ask if ONGC should be given preferential treatment, and avoid the shareholder voting process. Stating that PSU shareholders have expectations regarding governance standards, it said the current legal framework fails to provide a level playing field. "The Government is often able to push its agenda forward, which might not always be in the best interests of the company's direct and immediate stakeholders," it said. The advisory firm said there is a need for greater introspection across the board. "In the listed space, there cannot be different standards for PSUs and private companies. It is time for the Government and regulators to bridge this governance gap," it said.

While listing of PSUs is cited as the biggest driver of accountability and transparency, there is a big divergence in standards applicable for state-owned and private companies. "In ONGC?s case, the company is seeking regulatory exemptions. While IiAS supports the overall transaction, it believes that such leniency with regard to public votes are not warranted," the note said.