The government will continue to retain control over fuel retailer HPCL’s business strategy and management post its acquisition by Oil and Natural Gas corporation (ONGC), despite not being a shareholder of HPCL, Moody’s Investor services said in a report affirming the retailer’s credit rating.
“In Moody's view, the government's control over HPCL's business strategy will remain as strong as before. The government will continue to consider HPCL as a Central Public Sector Enterprise, which means that all major decisions of HPCL will have to be approved by the government. The government will also continue to appoint all of the board of directors of HPCL,” the report said.
Moody’s added the government will not be a shareholder of HPCL but will continue to provide support to the company as a regulator through setting price of controlled petroleum products, managing subsidy framework and as a provider of liquidity through the state owned banks.
State-owned Oil and Natural Gas Corporation (ONGC), the country’s largest oil and gas producer, has tied up Rs 35,000 crore with seven banks to fund the Rs 36,915 crore acquisition of HPCL. ONGC is expected to close the all-cash transaction by Wednesday.
According to Moody’s, the sale of stake also does not reduce HPCL's strategic importance to the government, as HPCL is the third-largest state-owned refining and marketing company in India accounting for 10.6 per cent of domestic refining capacity along with the marketing and distribution of 18.1 per cent of petroleum products consumed in the country.
"In addition to the expected extraordinary support from the government, we also expect ONGC to provide support to HPCL in times of distress. This is driven by ONGC's strong ability to provide support as reflected in its Baa1 ratings and its willingness to provide support, which is driven by HPCL's position as the largest subsidiary of ONGC. In addition, any default by HPCL will cause a default on ONGC under the terms of the latter's bonds given it will be deemed a material subsidiary," Vikas Halan, Moody's Vice President and Senior Credit Officer said.
He added that HPCL's ratings will remain constrained by the rating of the government given its linkages with the domestic economy. Post acquisition, HPCL will continue to operate as a separate listed entity with its board of directors and senior management separate from ONGC, Shashi Shanker, and Chairman of ONGC had told source earlier this month.
The acquisition of HPCL by ONGC will pave the way for the country’s first vertically integrated oil major. Finance Minister Arun Jaitley, in his budget speech last year, had announced the government’s plan to consolidate and integrate oil and gas Public Sector Undertakings (PSUs).