Three cash-rich rail PSUs — Ircon International, Rail Vikas Nigam and Rites — are likely to undertake buyback of their own shares before their initial public offerings (IPOs) hit the market later this year. The PSUs, however, are understood to have managed to lower buyback obligations after these units flagged significant capex plans for 2017-18 in a meeting with the department of investment and public asset management (DIPAM) recently.
As capex will be partly funded from reserves, the three PSUs might buy back shares worth about Rs500 crore, nearly one-fourth of the earlier estimate of Rs2,000 crore, an official told FE.
“The companies have shown in the meetings with DIPAM that they have plans for investments,” the above official said. For instance, Ircon recently formed a joint venture in Chhattisgarh to make rail tracks for transportation of coal. The three rail PSUs together had cash and bank balance of over Rs10,000 crore as on March 31, 2016.
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On May 27, 2016, the Centre had issued a capital restructuring order mandating every central PSU with a net worth above Rs2,000 crore and cash and bank balance of over Rs1,000 crore to exercise the option to buy back a portion of their shares with effect from 2016-17. Companies with significant capex plans can seek exemption from buyback compliance.
Earlier this month, FE had reported that NTPC, which flagged a whopping Rs28,000-crore capex plan for 2017-18, was exempted from the buyback obligation, which could have fetched the exchequer nearly Rs8,000 crore in the current fiscal. Another rail unit, IRFC, has already got exemption from buyback citing its fund requirement for business growth. Among other methods, buybacks and IPOs are part of government’s ambitious disinvestment programme of Rs72,500 crore for 2017-18.
The IPO plans for the three rail PSUs are also on track. Three book running lead managers have already been appointed for the Ircon share sale — IDBI Capital Markets & Securities, SBI Capital Markets and Axis Capital. The size of the government stake sale in these units would be announced closer to the date of IPO, but will be 10-15%.
The government is of the view that buybacks improve some key financial ratios such as earnings per share of the firms and, thereby, investor interest in them, enabling them to tap the market for funds when needed. DIPAM’s capital restructuring rules have paid off as seven PSUs bought back shares worth Rs18,963 crore or 41% of the total disinvestment receipt of Rs46,247 crore in 2016-17. Share buybacks are likely to be replicated this year as well to meet the ambitious disinvestment target. According to the criteria, nearly 20 central PSUs qualify for buyback including ONGC, BHEL, Oil India, Mazagon Dock, Airports Authority of India and SJVN.
According to a government analysis, nearly two dozen cash-rich companies were parking surplus funds in banks. Post-tax, the bank deposits didn’t even yield more than 4-5% annual return, another official said.