OREANDA-NEWS. September 13, 2011. Oil and Natural Gas Corp. Ltd (ONGC) is seeking a six-year insurance cover of Rs.400 crore against potential compensation claims from shareholders as the government prepares to sell 5% of the firm’s shares in the market to raise at least Rs.10,500 crore.

It is the biggest cover sought by any public sector company in India for a share sale. State-owned Coal India Ltd (CIL) bought a cover of Rs.200 crore for its Rs.15,200 crore initial public offering (IPO) of shares last year.

The size of the cover reflects the management’s perception about the accuracy of disclosures and the company’s ability to fulfil commitments made in the offer document for the upcoming share sale, according to officials at state-run insurers.

“The cover depends on the degree of risk perceived. The company doesn’t deal with the lead managers directly before taking insurance cover for their issues. But if a company gets a good cover at a small premium, what is the harm?” a banker involved in the ONGC deal said on condition of anonymity.

The so-called public offering of securities insurance policy typically covers share issuers against claims made by subscribers for misleading forward-looking statements and insufficient or erroneous disclosures made in the issue prospectus, which could be legally proved to have caused financial loss.

“ONGC has a diverse set of investors from various countries. The foreign institutional investors in the US and few other Western countries are known to be big litigants and if a company is selling shares to this category of investors, it’s always better to go for a higher cover as the claims could go really high,” said another banker who has been handling a number of public floats by state-owned firms. He, too, declined to be named.

Only two firms—real estate developer DLF Ltd and software services provider Tata Consultancy Services Ltd—obtained higher covers of around USD 100 million (or Rs.470 crore) before they sold shares in the market, according to officials of insurance companies. TCS and DLF had raised Rs.5,420 crore and Rs.9,188 crore, respectively, from their IPOs.

Under the draft policy being discussed with insurers, ONGC will pay claims of Rs.90 lakh from investors in the US and Canada, and up to Rs.50 lakh to settle claims from shareholders outside these two countries.

Mint has reviewed the draft policy, which ONGC circulated among the four state-owned insurers and some private ones, seeking from them firm price bids, which are to be opened on Tuesday. CIL had paid last year a premium of Rs.1 crore for a Rs.200 crore cover under a similar policy.

“The thumb rule is to seek a cover of 1-1.5% of the amount being raised (through the share sale), but ONGC is seeking a much bigger cover by that standard,” said an official of National Insurance Co. Ltd (NIC), a state-run insurer.

“It is a standard cover,” said D.K. Saraf, director, finance, ONGC. “There wouldn’t be much difference in the premium for seeking a bigger cover; so it makes sense.”

“The amount of cover obtained depends entirely on the management’s risk perception,” said N.S.R. Chandraprasad, chairman and managing director of NIC. “For the insurers, the key determinant for providing the cover is the credibility of the company selling the shares.”