Jairam Ramesh’s open letter to Chairman, SEBI

Dear Shri Sinha,

You are aware that Oil & Natural Gas Corporation Ltd (ONGC) is a public sector undertaking of the Union Government in the navaratna category. It is a publicly listed company with a market capitalisation of over ₹2 lakh crores. As per ONGC’s published annual report, it has nearly 6 lakh shareholders as of March 31, 2016. Of these 6 lakh shareholders, nearly 5.5 lakh are small shareholders owning less than 500 shares of ONGC each.

SEBI has been an alert regulator in protecting the interests of small and minority shareholders of listed companies. It has rightly been adjudged among the best in the world in minority shareholder protection under your tenure.

On December 23, 2016, ONGC issued a statement to the stock exchanges about its decision to acquire gas blocks in the Krishna Godavari (KG) basin for a total consideration of nearly $1.2 billion (₹8,000 crores). These gas blocks belong to the Gujarat State Petroleum Corporation (GSPC), a public-sector undertaking of the Gujarat Government.

By way of background, GSPC has been trying to recover gas from the KG basin block for more than a decade without much success despite massive borrowings. The Comptroller and Auditor General of India (CAG) has issued a scathing report indicting GSPC of incurring massive losses to the exchequer through dubious transactions. The CAG report submitted in the Gujarat assembly in March 2016 notes that GSPC has loans outstanding of nearly ₹20,000 crores. The company is facing interest dues alone of ₹1,800 crores every year. Its profits have collapsed to a mere ₹23 crores. GSPC is on the verge of bankruptcy.

In GSPC’s own words, “geographical and geophysical conditions in the KG block have made it a technical challenge to explore and develop. Factors such as low porosity, low permeability, high pressure, high temperature and a tight reservoir make for geological complexities of the kind which has rarely been tackled earlier by any exploration and production (E&P) company in India”.

When GSPC is asked why it indulged in such excessive borrowing, it said it was to explore for gas in the KG basin. When asked where is the gas after a decade of exploration, it said it is technically very difficult to extract gas. When questioned why GSPC continued to borrow knowing fully well it is difficult to extract gas, it could not provide a convincing answer except to say it kept trying to extract gas.

So, GSPC has spent large sums of money, hired foreign experts and imported sophisticated equipment and yet could not find gas. Then, why does ONGC deem it fit to pay ₹8,000 crores to acquire this very block?

ONGC says “The acquisition of the KG block fits well with the strategy to enhance natural gas production from domestic fields on a faster pace”. This is a bewildering justification when the owner of the asset itself claims it is virtually impossible to extract any gas.

“We see limited merit in ONGC’s strategy of acquiring these assets. This acquisition may not create meaningful value to shareholders”. This is what the investment bank Kotak Securities said about ONGC’s plan to acquire GSPC’s KG block.

“ONGC’s cash balance will take a 63% hit for an acquisition that will not add any value” – this was Bloomberg’s evaluation of ONGC’s plans. There is no analyst who thinks this is a good strategy for ONGC and its shareholders. ONGC’s cash reserves belong to all its shareholders. Did ONGC secure the permission of the minority shareholders as well to use their cash to bail out GSPC?

As per SEBI regulations, such material transaction between two related parties needs the approval of the minority shareholders. ONGC’s board resolution states “the engagement between ONGC and GSPC has set a pioneering example of synergy of strategies of Government owned companies in upstream sector of oil & gas industry”.

As per ONGC’s own admission, ONGC and GSPC are related parties of the Government of India. It is needless to say that there is indeed a strong “relationship” between the Government of Gujarat that owns GSPC and approved its borrowing binge between 2005 and 2014 and the Government of India that owns ONGC, which suddenly after 2014 seems to have had a realisation that buying GSPC’s gas block in KG basin is a virtue. Clearly, this entire ONGC-GSPC deal is an utter sham.

ONGC has flouted SEBI guidelines (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS Reg. 23-4) and did not secure the approval of the minority shareholders for this transaction. SEBI should order an inquiry into this proposed transaction immediately.

The sanctity and integrity of the venerable 83-year-old institution called the Reserve Bank of India has been demolished following the demonetisation of November 8, 2016. Its credibility has been severely damaged. In this context, it is even more imperative that the 25-year-old institution called SEBI guards its professionalism fiercely.

It is incumbent upon SEBI to investigate this proposed ONGC-GSPC transaction on behalf of minority shareholders. Specifically, SEBI’s guidelines prescribe a ‘majority of minority’ rule for material transactions of listed companies, including PSUs. Therefore, I urge you to examine this proposed transaction between ONGC and GSPC in the greater interest of 5.5 lakh small shareholders spread across small cities and towns of India.

Yours sincerely,

Jairam Ramesh, Member of Parliament

Also see ‘The curious link between demonetisation, RBI and GSPC’

Jairam Ramesh is a Congress Rajya Sabha MP and a former Union Minister