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New Delhi: The Modi government’s policy of pushing state-run firms to shell out more dividends, go in for buybacks and acquire stakes in other state-owned firms to meet its fiscal deficit targets has badly hurt the country’s biggest oil explorer and a public sector star — the Oil and Natural Gas Corporation.

ONGC is operating on precariously low cash reserves as it looks to pay off debts from its acquisition of Hindustan Petroleum Corporation Limited (HPCL) and follow the government’s diktat on share buybacks and dividend payouts.

As of September 2018, ONGC’s cash and bank balances were at Rs 167 crore, down from Rs 1,013 crore in March 2018 and Rs 9,511 crore in March 2017.

The firm has been using its accruals to pay off its loans, which have nearly halved to Rs 13,994 crore (September) from Rs 25,592 crore in March 2018.

ONGC did not respond to questions from ThePrint. This report will be updated when it does.

Also read: Modi govt’s oil policies hurt bid to sell stake in ONGC

Why it’s a problem for ONGC

Oil explorers, due to the risky nature of the business, need sufficient cash balances to meet their working capital requirements. This should ideally be more than Rs 5,000 crore, former ONGC officials said.

ONGC acquired HPCL for Rs 36,915 crore last year as part of the government’s efforts to meet its disinvestment targets. While it funded a part of the acquisition through cash reserves, it borrowed in excess of Rs 20,000 crore for the acquisition.

“All of ONGC’s cash reserves were utilised in HPCL’s acquisition. ONGC had to borrow funds in addition to using its reserves to fund the deal. The cash accumulations are not happening because ONGC is using the surpluses to pay back the debt. The balance sheet as of September-end shows that more than half the debt has been repaid,” said a retired senior ONGC official, who did not wish to be identified.

“In addition, the dividends also have to be paid. All this is eroding the surplus. Ideally, in exploration, working capital requirements have to be met and a cash balance of Rs 5,000-10,000 crore is needed.”

ONGC paid a dividend of Rs 8,470 crore in 2017-18, including dividend distribution tax, compared to Rs 7,764 crore in 2016-17.

In addition to the dividends, ONGC also announced a share buyback in December of Rs 4,022 crore.

‘Alarming’ situation

Aloke Kumar Banerjee, former director (finance) at ONGC, said such “alarming” levels of cash balance have never been witnessed in the corporation’s history. He attributed it mainly to the recent acquisitions by ONGC — both HPCL and the Gujarat State Petroleum Corporation’s stake in the KG Basin gas block.

“Companies involved in exploration and production typically require some cash for leverage, as it’s a high-risk business. Internationally too, E&P (exploration & production) companies do business mainly on equity and not on debt. Better liquidity also helps in improving the firm’s credit rating internationally at the time of raising funds,” Banerjee said.

“The capital expenditure and operating expenditure of ONGC will be more than Rs 1 lakh crore. Typically, the level of the cash reserves should meet at least one month’s expenses.”

However, Banerjee also added a positive observation — that the rising oil and gas prices will help ONGC quickly replenish its reserves.

Also read: Modi govt promised to raise India’s crude oil output – but it actually dropped last 5 yrs

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