The finance ministry has successfully persuaded the central bank to agree to its plan to raise a clean loan from banks on the strength of government stakes in some companies held through the Specified Undertaking of the Unit Trust of India (SUUTI) and use it for disinvestment of public sector units (PSUs).

The proposal is to bridge the shortfall in non-tax revenue by enabling a new asset management company (AMC) to buy government stakes in some PSUs, enriching the exchequer in the process. Other ministries concerned have also decided to support the proposal after they were convinced of the urgency of the proposal which will help reduce the fiscal deficit to some extent. The Cabinet will take up the proposal for clearance on March 1, a source privy to the matter said.

According to the proposal, the government will first transfer its stakes in L&T, ITC and Axis Bank ? held through SUUTI ? to an AMC which will be created. The AMC will then take a clean loan from banks to buy government stakes in some public sector units. SUUTI holds 11.54% in ITC, 23.6% in Axis Bank and 8.3% in L&T. These stake are valued at around R32,000 crore.

However, the Reserve Bank of India (RBI) and some within the government had raised concerns about the high interest liability which comes with such loans. Moreover, the RBI had previously rejected the proposal to reduce the margin requirement from the existing limit of 50%. This would imply that the half assets of the new AMC will have to be kept free, bringing down the total loan to roughly R15,000 crore if one takes the total asset value, a senior banker explained.

With less than three weeks to go before the finance minister unveils Union Budget 2012-13, the finance ministry is pursuing the SUUTI proposal aggressively in order to reduce fiscal deficit for 2011-12 expected to touch over 5-5.5% of the GDP, as against the budgeted 4.6%.

Since the PSU stake sale plan largely a non-starter this year due to poor market conditions, all hopes are again pinned on the SUUTI proposal and the proposed sale of a 5% stake in ONGC to overseas institutional investors to raise Rs 12,000 crore.

With the finance ministry running out of options to raise funds, sources say the ministry has convinced all departments and regulators in favour of the plan and concurrence from all of them will now speed up the whole process.

The interest liability on monthly compound rate, against the amount of Rs 25,000 crore to be raised through a loan by the proposed AMC works out to be Rs 3,000 crore, which is more than SUUTI?s income of Rs 2,000 crore. Of this, the government gets Rs 800 crore by way of dividend income and interest from fixed deposits.

The ministry had also requested a special RBI waiver to keep interest rate at 10.75%, below the current commercial rate of 12-14%, the banker said.

Legal issues regarding winding up SUUTI have also given a tough time to the ministry. As per the UTI Repeal Act, the SUUTI administrator can wind up the company only after discharging all claims and obligations for which it was formed. This will make the task of persuading banks more tricky as its estimated liabilities are pegged at Rs 1,800 crore.

The RBI had also requested the finance ministry to seek approval from market regulator Sebi on the regulatory framework of the new company. The ministry has also proposed to exempt the new company from securities transaction tax (STT) estimated at Rs 85 crore and Rs 25 crore as stamp duty by the states.

Running against time to raise funds through this plan, the ministry has also given a time line of 15-20 days for this proposal to materialise, which might be cutting too thin in terms of calculating any money through the SUUTI route for the current fiscal.