The government wanted to sell 12,000 cr. worth shares of ONGC (42.77 cr. shares at a floor price of Rs. 290) today, and the auction – a special scheme that SEBI allows for promoter entities to offload shares in a market parallel to the stock market – seems to have been rescued by the public insurer, LIC.

Only about 9 cr shares were sold until the end of the auction, which means just 4,000 crores were collected. The rest (nearly 4,000 cr.) was pushed through by LIC just before 5 mins of the end of auction.

ONGC shares ended at Rs. 287 for the day, lower than the floor price of Rs. 290. The auction by itself has been a flop – the LIC rescue is what the government does when things don't go its way; after all, who's to question the public insurer what it will do with its money?

Earlier, State Bank of India (SBI) said it will bid for shares, which doesn't make any sense – SBI has huge problems with capital, with a really low capital adequacy ratio; any money it has will have to be used to shore up its capital base. It really has no business buying equity – if it loses, say, 100 cr. when the price of ONGC falls, that further hurts its capital ratios!

This stake sale comes a few days after a huge number of bids flooded Citibank's stake sale for nearly 10% of HDFC. Perhaps the government thought they'd pull through, but there was one big difference: the price. Citi sold HDFC stake at the 660 levels when it had ended the previous day at 700+. ONGC's floor price was ABOVE market price – very strange for a large stake sale. (That said, HDFC's P/E is like 25 versus ONGC's 10)

But the main issue is: Oil under-recoveries by the likes of HPCL, BPCL and IOC are over 125,000 cr. for this year. Some of this is usually thulped on ONGC; we don't know how much, and it's decided at the whims and fancies of the government. Sure, ONGC is quoting at only 10x the profit of FY12, but if these profits can be eroded by a simple random statement that assigns ONGC the bulk of the refiners' losses, then the uncertainty in earnings makes the share a shaky buy.

The government of course does not want clarity because they need to stuff as much loss to ONGC as possible. They simply cannot subsidize the losses on their own balance sheet, where the fiscal deficit is already at 5.5% of GDP or more. So the profitable public sector oil entities (read; Oil India and ONGC) will have to take big hits through "upstream sharing". If they do reveal how much, no one will buy the ONGC shares. And I suppose because they didn't, not many were interested either. The LIC deal may have saved the day: we'll know soon when the mandatory disclosures come in (LIC already owns 5% of ONGC, they have to disclose further purchases). LIC supposedly rescued the NTPC IPO earlier!

Subsequent auctions are going to be tough. The government needs to relook pricing. It sold NHPC at Rs. 36 – a ridiculously overpriced share – and it sits at Rs. 21 today after more than a year. Too many public sector stake sales are at unreasonable prices, and LIC can't rescue them every single time.