The government fell just short of its target in a chaotic $2.5 billion auction of shares in Oil and Natural Gas Corp getting off to a faltering start in its bid to revive government stake sales to patch its widening fiscal deficit.

The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) said late on Thursday that investors bid for 98 per cent of the shares on offer, dashing expectations that it would all be snapped up.

"It will be a huge disappointment for the government that the issue was not fully covered, and this will lead to lot of rethinking on the privatisation drive in the near-term," said Juergen Maiar, a Vienna-based fund manager with Raiffeisen Euroasien Aktien.

The floor price for the auction had been set at 290 rupees late on Tuesday, a 2.3 percent premium to the day's closing price, prompting criticism that it should have been priced at a discount to ensure success.

Still, market watchers had expected big institutions like state-run Life Insurance Corp of India (LIC) and State Bank of India to take up any shares in the event of weak demand.

"I think greed played out here. This should be one of the lessons -- not to try and price the offering at a premium, especially when a reference point is available in the market price," said Ambareesh Baliga, chief operating officer at Mumbai's Way2Wealth Securities.

Market commentators slammed the government's handling of the long-delayed sale, which was conducted via auction on the stock exchanges -- a first-of-its kind process in India that seeks to avoid expensive roadshows and save time.

"The ONGC issue should have been priced at a discount and planned out well, which would have created a positive sentiment for future disinvestments," said Sunil Jain, vice president of equity research at Nirmal Bang.

Under India's auction process, if the offer is not fully subscribed, the seller has the option either to accept the bids received or reject the entire auction process. India's deficit-strapped government is expected to accept the bids.

GLITCHES
A government official said details of final bids were delayed by a system glitch caused by a lot of last-minute orders.

The stock exchanges said order levels at the close of the auction earlier in the day had reflected demand of only about two-thirds of the shares on offer because some orders were erroneously rejected by custodians.

The government had offered 427.77 million shares, or 5 per cent of the company's equity, in an issue that ranks among India's five biggest equity offerings. The auction saw demand for 420.3 million shares.

Shares in ONGC, the country's largest oil and gas producer and second-most valuable listed firm, ended the day down 1.7 per cent at Rs 288.20.

The government had earlier planned to sell ONGC shares through a public offer, but that was scrapped last October after a tepid response from investors when equity markets were weak.

The disappointing demand means the government may rethink its approach to further state share sales.

"They definitely need the money, and probably they will now look for easier ways, like selling its shares back to the public sector units," said Maiar, who manages $300 million worth of Indian stocks including ONGC.

"We could see some more of that in the coming weeks." India on Thursday allowed cash-rich state companies to buy back shares.

Any cash returned through share buybacks would help the government, the biggest shareholder in these companies.

New Delhi is on track to fall far short of its target of trimming its fiscal deficit to 4.6 per cent of GDP in the fiscal year that ends this month.

The government had hoped to raise $8.1 billion in the current fiscal year but had managed just $250 million before the ONGC deal.

India's stalled divestment programme also calls for reduced holdings in other state-run firms such as Bharat Heavy Electricals and Steel Authority of India.

Citigroup, Bank of America Merrill Lynch, HSBC, Morgan Stanley, Nomura and India's JM Financial advised on the ONGC deal.