Disinvestment funds may be used for bank recapitalisation from FY14

Written by fe Bureau | New Delhi | Updated: Dec 21 2012, 07:52am hrs
In a bid to fast-track recapitalisation of the public sector banks and insurance companies, the ministry of finance has proposed to set up an empowered group of ministers headed by finance minister P Chidambaram to use the disinvestment proceeds for this purpose from the next fiscal year.

The proposal comes in the wake of the finance ministrys attempt to work out a more productive use of funds from PSU stake sales which were earlier used to finance capital needs of social sector schemes.

The proposal mooted by department of disinvestment has garnered support from the other departments of finance ministry. The disinvestment proceeds will be used to subscribe to the shares of public sector banks and insurance companies on rights basis and for preferential allotment of shares in order to ensure 51% ownership of the government is not diluted.

The EGoM, apart from finance minister will comprise the minister of corporate affairs, minister of department of public enterprises, deputy chairman planning commission and the minister in charge of the public sector bank, the public sector enterprise or the insurance company recipient of the disinvestment funds.

Originally the disinvestment proceeds were channelised into the National Investment Fund which is maintained outside the Consolidated Fund of India. The fund is professionally managed by LIC, UTI and SBI. The framework allows 75% of the annual income of the fund to be used to finance social sector schemes. The residual 25% will be used to meet the capital requirement of profitable PSUs. Faced with financial crunch to meet widening government spending, CCEA in 2009, granted one time exemption for full utilization of stake sale funds for next three years for financing capital expenditure needs of social sector schemes. However, the existing corpus of NIF was to remain with the asset management companies till March 2012.

The DoD proposal, circulated to other ministries last month, says that the NIF remodelling would apply only from the next financial year and would involve doing away with the asset management companies of LIC, UTI and SBI.

In their place would be an inter-ministerial group headed by the disinvestment secretary to apportion the utilisation of divestment receipts that are transferred to the fund.

Although all departments of finance ministry have supported the proposal, the Department of Economic Affairs have added that disinvestment proceeds should be used for creation of assets like roads, power sector and others and for infrastructure financing.

The government decided to constitute the NIF in January 2005 for parking the realisation from sale of minority shareholding of the government in profitable PSUs. The fund is maintained outside the Consolidated Fund of India.