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BW Businessworld

Cabinet OKs PSU Share Buyback

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Hard pressed for funds, the government on Thursday approved the proposal for expediting disinvestment through the buyback route under which blue chip state-owned companies will buy its stake. This is expected to help the government narrow its widening fiscal deficit.

The decision to allow Public Sector Undertakings (PSUs) to buy back shares was taken by the Cabinet headed by Prime Minister Manmohan Singh, sources said.

The proposal will allow the government, which has not been able to reach anywhere near the disinvestment target of Rs 40,000 crore in 2011-12, to raise funds by selling its stake in the PSU to the same undertaking.

Two dozen of India's largest public sector companies, including Coal India, power utility NTPC, miner NMDC, Steel Authority of India and oil producer ONGC, hold cash reserves of 1.8 trillion rupees, media reports have said.

The government till date has been able to raise only Rs 1,145 crore from PFC. Its sale of stake in ONGC through the auction route may fetch another Rs 12,000-13,000 crore.

Market regulator Securities and Exchange Board of India (Sebi) had earlier relaxed norms for buyback of shares and dilution of equity by companies.

The new norms would help the companies to complete the process of selling shares within days against the normal process which can take months.

Besides reducing the timeline for completion of buyback of shares by companies to 34-44 days, Sebi had also introduced a new mechanism called Institutional Placement Programme (IPP) that would allow promoters to sell up to 10 per cent of their capital through an auction.

Due to the volatile stock market scenario, the finance minister had been compelled to defer share sale of state-owned companies like Oil and Natural Gas Corporation, Steel Authority of India Ltd and Indian Oil Corporation. The government had been planning to reduce its deficit via stake sale of public sector units.

Earlier in December, asked if share buyback by public sector undertakings is among the options, Finance Secretary R S Gujral said: "There are options, including buyback. That is one of the options".

The Secretary, however, had said the decision on process of disinvestment will be taken by Finance Minister Pranab Mukherjee in consultation with Department of Disinvestment. "It is between Disinvestment Secretary and the Finance Minister. If any of those options require Cabinet approval, the ministry will take it. We are working on it," he said.

"It seems fiscal management is right on top of the government's mind," said Jagannadham Thunuguntla, head of research at SMC Global Securities.

"They are looking at all modes possible to reach their Rs 40,000-crore target -- if not this year, then early next year."

On Thursday, the Cabinet Committee on Economic Affairs approved the buyback proposal and allowed cash-rich state firms to bid in the divestment programme.

"It all depends on companies, it is just an enabling provision," Praful Patel, minister of heavy industries, told reporters.

When asked about the decision, Finance Minister Pranab Mukherjee said, "I can't say anything about the Cabinet decision which has been taken. There is due procedure and it will be announced in due course."

In order to fast track the disinvestment programme, the Department of Disinvestment (DoD) had already sought opinion of the ministries concerned for buyback of shares and has prepared a list of cash-rich PSUs.

Several ministries like oil, power, steel, coal and mines, however, are believed to have opposed the proposal saying it could impact the expansion plans of the PSUs.

Funds raised through the buyback of shares would to some extent help the government in bridging the fiscal deficit which during the first 10 months has exceeded the annual target.

According to Govinda Rao, a member of the Prime Minister's Economic Advisory Council (PMEAC), the fiscal deficit could exceed the budget target of 4.6 per cent of the Gross Domestic Product (GDP) by one percentage point.

Since the beginning of the disinvestment programme, the government has divested stake in PSUs either through initial public offers (IPOs) or follow on public offers (FPOs).

Under current regulations, listed companies are required to have minimum public shareholding of 10 per cent, but at least eight state firms, including Hindustan Copper, HMT, MMTC Ltd and State Trading Corp currently don't comply with these rules, analysts said.

Other cash-rich companies, such as Coal India or NTPC or SAIL, whose cash reserves are far beyond their expansion or acquisition plans, may consider investing in share sales in other public sector companies.

"If the companies have surplus cash they can go for this option," a government source said adding: "The final decision would be taken by the company boards."

(BW Online Bureau & Agencies)