By JACKIE RANGE and RAKESH SHARMA
NEW DELHI — A Goldman Sachs report that raised corporate governance
concerns about India’s largest oil and gas company by revenues and
production has struck a nerve among investors in India.
On Thursday, investors unloaded shares in Oil and Natural Gas Corp.
after the brokerage released a report that estimated the government
had taken away almost $20 billion in cash over the last six years
without consulting the company’s minority shareholders. That sum
includes an estimated $6.5 billion for fiscal 2009, which ends March
31 this year. The government is ONGC’s biggest shareholder, holding
74.13%.
Oil and Natural Gas Corp.’s Bombay stock exchange listed shares fell
as much as 4% and closed Thursday’s session down 1.90%. India’s
benchmark index, the Sensex, closed down 2.94%. Market watchers said
the shares had fallen on the back of the bearish report from Goldman
Sachs.
The management and accounting at Indian companies has come under the
spotlight in the wake of a scandal at outsourcer Satyam Computer
Services Ltd. India’s Ministry of Corporate Affairs, which is
spearheading the investigation into Satyam, has also ordered a probe
into charges of accounting irregularities at Educomp Solutions Ltd, a
New Delhi-based provider of software and content for educational
institutions. Educomp said the investigation followed a demand from
the company itself to investigate a slump in its share price.
Earlier this year, Satyam’s former chairman admitted to overstating
the company’s profit and revenue and creating a fictitious cash
balance of more than $1 billion. Since then, the market has become
more wary of corporate governance issues.
In the report released Thursday, Goldman Sachs reiterated its sell
rating on ONGC’s stock and pointed to a number of factors which are
likely to weigh on the stock, which included its “unexciting” domestic
track record, the company’s overseas growth strategy and “long running
corporate governance issues.”
The key concern about corporate governance centered on the near $20
billion removed to subsidize loss-making oil marketing companies.
Those state-owned companies had been hurt by government policies meant
to protect consumers from high oil prices. The government fixes the
price of some fuel products such as kerosene and diesel, so oil
importers have recently incurred losses by buying at a high price and
then selling low in India.
The report also said that investors and independent directors had
objected to the practice, but that “there has not been headway on this
issue.” It added that similar issues “would likely cause serious
concern” at privately run companies.
An ONGC executive said he couldn’t comment on what Goldman’s $20
billion estimate, but confirmed that the company does help the
government compensate companies for subsidy-related losses. “If you
are purchasing the shares of ONGC, as a shareholder you are aware of
this,” said the executive, who declined to be named. “You have been
told there is a subsidy burden.”
ONGC’s Chairman R. S. Sharma told Dow Jones Newswires that the company
hadn’t violated corporate governance standards and had kept its board
informed about the subsidies. “There are no issues of corporate
governance having been compromised at any point of time,” said Mr.
Sharma.
While the Indian government hasn’t defined how arrives at the size of
the subsidies, or when they’re expected to be paid, one analyst played
down the potential trouble for ONGC.
“It’s more of a policy issue regarding share of revenues to be given
by ONGC to the government,” said Niraj Mansingka, an analyst at
Edelweiss Securities in Mumbai. Mr. Mansingka said that the payments
should be consistent and predictable rather than decided in an “ad hoc
nature.”
—Santanu Choudhury contributed to this article. Write to Jackie Range
at jackie.range@wsj.com and Rakesh Sharma at
rakesh.sharma@dowjones.com
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
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