Following up on Finance Minister Arun Jaitley's Budget announcement of creating an integrated oil company, ONGC evaluated options of acquiring either Hindustan Petroleum Corp Ltd (HPCL) or BPCL - the two downstream oil refining and fuel marketing companies.

While acquiring either one of them made a lot of business sense, ONGC found the nation's second-biggest fuel retailer, BPCL too expensive, sources privy to the development said.

BPCL has a market cap of Rs 1,01,738 crore and buying government's 54.93 per cent would along have entailed an outgo of Rs 55,885 crore.

So, ONGC is in favour of acquiring HPCL, which has a market cap of Rs 54,797 crore and buying government's entire 51.11 per cent stake would entail an outgo of Rs 28,006 crore. Another Rs 14,000 crore or so would be required in case open offer has to be made.

Sources said while initially the government was looking at creating an integrated oil company through merge of an oil producer with a refiner, the idea was dropped for the fear of not repeating of the Air India-Indian Airlines merger.

Similar differences in work culture and ethos prevail in upstream and downstream firms and so the exercise under consideration now is to only help government mop up resources and HPCL would become a mere subsidiary of ONGC.

ONGC already has a refining subsidiary in Mangalore Refinery and Petrochemcials Ltd (MPRL).

Sources said an open offer to buy another 26 per cent stake from other shareholders of HPCL would at current price cost ONGC another Rs 14,247 crore.

As per Sebi's takeover code, if a company acquires more than 25 per cent in another listed company, it has to make an open offer to buy at least 26 per cent more in the target firm.

Some reports have suggested that ONGC buying government stake in HPCL may not trigger an open-offer rule as the government's holding is being transferred to another state-run firm and the ownership is not going to change.

But sources said that way back in February 2002, state- owned Indian Oil Corp (IOC) had acquired government's 33.58 per cent stake in fuel retailer IBP Co Ltd for Rs 1,153.68 crore and had to make an open offer for additional shares.

Both IOC and IBP were government owned companies.

Sources said the oil ministry and ONGC may try and seek exemption from the open offer to keep the acquisition cost low.

ONGC has cash reserve of Rs 13,014 crore and to fund the government stake acquisition in HPCL it will have to borrow at least Rs 18,000 crore, they said.

If the open offer is made, additional borrowings would have to be done.

There are only six major companies in the oil sector - ONGC and Oil India Ltd being the oil producers, Indian Oil Corp (IOC), HPCL and BPCL in refinery business and GAIL in midstream gas transportation business.

The rest such as ONGC Videsh, Chennai Petroleum Corp (CPCL), Numaligarh Refinery Ltd and MRPL are already subsidiaries of one of these six PSUs.

Sources said the options were very limited and ONGC chose HPCL over BPCL.

HPCL will add 23.8 million tonnes of annual oil refining capacity to ONGC's portfolio, making it the third-largest refiner in the country after IOC and Reliance Industries.

ONGC already is majority owner of MRPL, which has a 15- million tons refinery.

Sources said ONGC buying HPCL will require two sets of Cabinet approval - one where the government approves sale of its all or part of its 51.11 per cent stake to ONGC, and the other for allowing ONGC to spend the money on stake buy.