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India’s Cabinet approves sale of entire government stake in HPCL

India’s Cabinet has approved in principle a proposal to sell the government’s entire 51.11% stake in Hindustan Petroleum Corp. Ltd. (HPCL) to another state-owned company, Oil and Natural Gas Corp. (ONGC), which will create an integrated oil major that can compete with major local, as well as international, players.

ONGC may have to shell out INR30,000 crore (USD4.6 billion) for the 51.11% stake in HPCL. The proceeds from the transaction will cover about 40% of the government’s divestment target of INR72,500 crore (USD11.26 billion) for 2017-18.

The transaction, which is expected to be completed in one year, is unlikely to involve an open-offer, as the government’s holding in HPCL is being transferred to another government entity, although India’s takeover regulations require that if a company acquires more than 25% of another listed company, it has to make an open offer to buy at least 26% more.

“It is good for all the shareholders of both companies since integrated companies are much stronger and therefore valued by the market at higher multiple than stand-alone companies,” said ONGC Chairman Dinesh Sarraf.

The combined market value of ONGC and HPCL would be USD42 billion, which makes it comparable in size to Russia’s Rosneft’s with USD56 billion.

ONGC, which produces 60% of India’s crude oil, will also become the country’s third-largest oil refiner, controlling more than 40 million tonnes per annum of oil refining capacity. ONGC already controls a 15-million-tonne refinery through another unit, MRPL. The transaction would also give ONGC control over HPCL’s 14,500 service stations, which represent about a quarter of India’s total.