The government is considering parking a large chunk of the central public sector enterprises’ (CPSEs) “reserves and surpluses” with a special purpose vehicle (SPV), with the twin objectives of imparting more efficiency to the process of investing these funds and enabling the firms to fetch higher returns on their surpluses. At last count, the CPSEs’ reserves and surpluses stood at around `8 lakh crore. Most of these are currently parked in banks and mutual funds. The latest proposal takes cue from a model successfully followed by Gujarat over the last few years: the state government-owned Gujarat State Financial Services (GSFS) manages the surplus funds of state-level agencies and PSUs, pays a 6.5% annual interest on deposits of up to three years and lends from the corpus to the needy state PSUs at rates lower than banks do, by doing away with a large part of intermediation costs. The PSUs that have workable investment plans get to use the loans from GSFS, while these funds would have otherwise remained unutilised with the firms that were holding them. According to official sources, the move would give CPSEs, which have the ability to investment in new projects but are finding it difficult to get loans, easy access to low-cost funds pooled from their peers. The deposits in the SPV could be between 3 months and 3 years and advances too are likely to be of similar tenures. The proposed SPV could deploy idle funds in the market to generate revenues, if there is not sufficient investment demand from PSUs, the sources added.
Currently, the CPSEs borrow at 10%-plus interest rates from banks, but get only 4.25% on bulk deposits up to three-years. In contrast, under a liquid deposit scheme (similar to current account), GSFS pays 5.5% interest per annum compared to nil by banks. Of the reserves and surplus held by CPSEs at the end of FY16, over Rs 2.43 lakh crore was “surplus,” almost equal to the aggregate short-term borrowings by the CPSEs in FY16. While reserves are tied to specified objectives, surplus accounts are where profits reside and dividends are paid off. Coal India, BHEL, ONGC, Oil India and BPCL are among the CPSEs with the largest amounts as surpluses. At the other end, a clutch of state-run entities like FCI, IndianOil, SAIL, RVNL and Air India are the biggest short-term borrowers among CPSEs, meaning if cheaper funds will enable them to implement their projects faster or remove working capital constraints (see chart).
“Reserves and surpluses” usually consist of capital reserves, securities premium reserve, general reserves and surplus for the year. Unlike surplus, reserves are parked in term deposits of various maturities and current accounts, besides mutual funds. The surplus is cash and cash equivalent instruments like current and savings bank balance and liquid instruments of less than 3-months maturity. In FY17, ONGC had the highest reserves and surplus with Rs 1.54 lakh crore.
While the idea of a central SPV similar to GSFS has got a lot of traction policymakers, there are also concerns about its possible adverse impact on banks and mutual funds, as the withdrawal of these funds by cash-rich CPSEs would undermine one of their chief avenues for low-cost funds. Some officials have also reservations about the possible impact of the move on the autonomy of CPSEs.
The latest thinking assumes importance after government managers last year expressed displeasure with CPSEs parking funds in bank FDs, which give negligible real returns after factoring in inflation and taxes. The government had asked these firms to give higher dividends, buy back shares and issue bonus shares using the reserves and surpluses. The CPSEs’s dividend to the Centre more than doubled to Rs 77,000 crore in FY17 while these entities also contributed another Rs 19,000 crore to the exchequer by buying back a portion of their shares from the government, helping it contain fiscal deficit at budgeted levels.