New Delhi: The boards of directors of Indian Oil Corporation (IOC) and IBP have set the swap ratio for the merger of their companies at 1.25:1. This effectively means that IBP shareholders would get 125 IOC shares for every 100 held by them. Institutional shareholders were expecting between 135 and 150 IOC shares for every 100 IBP shares, but IOC chairman and managing director MS Ramachandran said the swap ratio was "quite generous".

He said share prices of the past six months, expected earning potential of IBP and the company's valuation were taken into consideration before taking the decision. "We have taken extra care to be fair to shareholders," he said.

The IOC board also cleared a proposal to pay an interim dividend of 45 per cent, which will result in an outgo of Rs526 crore.

The merger is likely to result in a reduction in overhead expenses by about Rs45 crore a year on account of tax savings. It will also lead to a more effective utilisation of cash flow and increased market capitalisation.

IOC holds 53.58 per cent in IBP, while institutional investors hold 12.21 per cent and 34.21 per cent is held by the public.

The company had acquired the government's 33.58 per cent stake in IBP in 2002 and subsequently bought another 20 per cent through an open offer. The government sold its remaining 26 per cent in IBP through a public offer in March this year.

IOC's paid-up capital after the merger will increase to Rs1,196 crore from the present Rs1,168 crore. The government's equity in IOC will decrease by less than 1 per cent because of shares being allocated to IBP shareholders. At present, the government holds 82.03 per cent in IOC.

The 11.87 million IBP shares held by IOC would be transferred to a trust, Ramachandran said, adding that the IBP brand would be retained.

The merger will take about three months to be completed since it has to be approved by the government, the Securities and Exchange Board of India and the registrar of companies.