02 March 2012

ONGC share auction - the comedy of errors that could be avoided

ONGC's auction of 5% shares yesterday through a special auction was doomed to fail. The failure has been widely reported. ONGC is public sector giant and the government which owns some 74% odd shares sought to sell 5% shares in the listed company through a special audition window in the exchanges. The market price of the share over the past has hovered around the 280 rupee mark. To price it at Rs. 290 was inviting trouble. Few would buy a packet of biscuit marked with a price of Rs. 10 at Rs. 10.10. Why then would someone pay more than the available market price, specially since the same product is available in the secondary market at a lower price. Besides being a bit dim to buy the same product at a higher price, as an institution you would also be in breach of fiduciary duty. So as a mutual fund or an institution investing other people's money you could actually be sued for wasting their money. This could be completely avoided by keeping the price marginally lower than the current market price.

I can see where the government was going with this though. I think the government had two issues at the back of their head - a) they expected the sale to have a control premium attached b) they did not want to be embroiled in another public allegation of selling the family silver at a discounted price what with so many other scandals coming to light. They were probably goaded by some self interested intermediaries involved in the process who told them that the shares could attract a premium.

At 5% level there clearly could not be a control premium attached - specially when no one entity could own over a fourth of 5% on offer (as per the regulations of SEBI only mutual funds and insurance companies can buy over a fourth of shares on offer - others are capped at that level - control premium at 1.25% levels anyone?).

At the end of the day, the entire episode became a comedy of errors - and all the errors were a by-product of the high price offered. Since the price wasn't attractive, the government made the right calls and made other public sector bodies to subscribe to shares in a last minute bid - which in the rush to punch in, was not entered properly, probably forcing the exchange to keep the auction window open beyond the 330 pm deadline to validate the erroneous trades. All these are media stories - no one really seems to know what happened - and we still don't know who subscribed to how many shares finally. Firstpost.com shows how three different newspapers have three different stories to the event. Though I would happily condone the problems in the auction, which I believe were done in good faith - at the least the government should disclose what happened and who bought how many shares.

Postnote: You can buy ONGC Ltd. from the market today (2nd March) at Rs. 281.45.

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