Pressed into thinking out-of-box to reinvigorate the slowdown-hit economy, the government is now looking at its time-tested public sector enterprises to change industrial sentiment with stepped up investments and merger and acquisitions.

As part of this strategy, the Centre is thinking of advancing the proposal of bri­nging about consolidation in the oil sector by facilitating not just one but two more mergers among PSU oil giants: The plan is to merger India’s second largest oil marketer Bharat Petroleum Corporation (BPCL) with country’s largest gas distributor GAIL (India) and country largest refiner Indian Oil Corporation (IOC) with second largest explorer Oil India (OIL).

The government has already taken the first step towards consolidation in the oil sector by approving the sale of its entire 51.11 per cent stake in India's third-biggest fuel retailer Hindustan Petroleum Corporation (HPCL) to state-owned oil explorer Oil and Natural Gas Corporation (ONGC).

“Both BPCL and IOC have written to the oil ministry about plans for integrating operations through acquisition and mergers both in domestic and overseas markets. Specific proposals are being considered and a decision may be taken soon,” said a government official privy to the development.

Financial Chronicle was the first to report about the move to create not one but two or more large integrated oil companies by merging state-owned oil companies in its edition dated February 10, 2017.

While e-mails sent to IOC and GAIL seeking information about merger proposals did not elicit a response, officials in the PSUs denied having any knowledge about specific proposals on mergers but said government was looking at various options to strengthen the companies.

 The CMDs of some of the companies have said in the past about aspirations for integration but have left it to the government to take the final call. Sources said BPCL’s acquisition of government shares in GAIL would be a sensible exercise for the company as it would help the oil refiner-cum-marketer to expand its petrochemical operations where GAIL is big operator and will also allow it to focus on building oil and gas pipelines.

Together the two entities would potentially have a revenue of about Rs 3 lakh crore with profit in the vicinity of Rs 12,000 crore. The market capitalisation of the integrated entity would be over Rs 1,40,000 crore.

The vertical integration of IOC with OIL would create a large integrated oil company with combined market capitalisation of over Rs 2 lakh crore and presence in entire value chain such as exploration and production, refining and marketing and petrochemicals. The revenue of integrated entity would be over Rs 4,50,000 with profits of close to Rs 21,000 crore.

Once approved, the proposals may entail IOC spending close to Rs 16,500 crore to buy out the entire 66.13 per cent stake that government and other state-owned companies own in OIL at current share prices..

Similarly, BPCL may have to spend over Rs 36,000 crore to buy 54.88 per cent of government and its promoted companies’ stake in GAIL. The shares of GAIL closed 2.37 per cent down at Rs 397.15 a piece on BSE at the end of trading last week.

While the consolidation of PSU companies would result in creation of three large integrated oil giants, it is the government that would walk away with additional revenue to the tune of Rs 85,000 if all the deals were completed within this fiscal year. This would be more than Rs 72,500 crore budgeted by the Centre through disinvestment and strategic sale in FY18.

“The deals could be windfall for the government which now seems to be struggling to bring back the economy on path of a recovery by stepping up public investments and offering stimulus packers for growth generating and employment creating sectors,” said an industry analyst.

But he added that completing three large deals in balance half of the FY18 would be difficult as the acquisitions would need large scale borrowings that could further squeeze the market and affect valuations.

Sources said like the plan of ONGC-HPCL merger, go­v­ernment might not tinker with the existing operations of OIL and GAIL while selling its stake in the companies. After share sale, OIL may become a subsidiary of IOC and maintain its focus on oil and gas exploration while GAIL could continue with its petroche­m­ical and gas transportation operations. In fact, BPCL may merge some of petrochemical operations with GAIL to consolidate operations.

Though BPCL has also shown interest for OIL, government may leave it with IOC. But, sources said that as IOC itself has big oil and gas exploration plan, it may consider BPCL’s proposal also as it will give the relati­vely smaller refiner an entry into exploration completing the chain of integration.