In a move to break the impasse over the shareholding of Hindustan Petroleum Corporation Ltd in ONGC-owned Mangalore Refineries Pvt Ltd, the government has decided to ask HPCL to bring down its stake from the existing 17 per cent to below 15 per cent.

A senior government official said the negotiated deal would have to be completed before the privatisation of HPCL took place later this year.

The decision was taken at a recent meeting between the divestment and the petroleum ministries. ONGC had been given the option of buying out HPCL's shares to the effect that the latter's holding in MRPL fell below 15 per cent, the official said.

He said the proposal was mooted by the ministry of divestment to ensure that the private firm which acquired HPCL, and thereby would get control of the stake it held in MRPL, did not qualify to increase its holding further through an open offer.

As per Sebi rules, an open offer has to be made by a shareholder if he acquires a holding of 15 per cent or more of the paid-up capital in the company. HPCL's current holding in MRPL is just under 17 per cent.

"Now, it entirely depends on ONGC as to how much it will like to acquire," the official said. ONGC, however, wants to acquire the entire 17 per cent shareholding of HPCL.

ONGC officials pointed out that acquiring another 2 per cent to its existing 71.6 per cent stake did not make sense as ONGC's holding would still remain below 74 per cent, which could protect it from the ability of the other shareholders to block special resolutions.

"Also, we have a shareholder's agreement with HPCL whereby it can nominate two directors on the board of MRPL. Now, we would not like a private oil company to nominate two directors on our board. As long as the shares are held by a PSU we do not have any issues really," the ONGC officials said.

In the past, ONGC has expressed its intent to buy out the downstream oil refiner and marketer's 17 per cent stake after it acquired MRPL from the Adiyta V Birla group. But according to industry sources, HPCL quoted a price which was rejected by ONGC.

ONGC, however, upped the ante particularly after the cabinet announced a deadline for the HPCL privatisation. The corporation wanted the HPCL stake to be unlocked before the process of HPCL's privatisation began. However, early last week, HPCL's data room was opened to the bidders for due diligence.

MRPL is a strategic investment for ONGC, which has so far been confined to the upstream part of the oil and gas business. MRPL is ONGC's maiden foray into downstream oil business and it was leveraging the refinery business to make an entry into petroleum product retailing.