With a bearish trend ruling in the stock markets, the government’s plan to raise R40,000 crore in the current fiscal by divesting a part of its shares in the central public sector enterprises (CPSEs) through public offers has run aground. Now the government has mooted the idea of CPSEs buying back the shares from government, in a change of disinvestment strategy to raise funds. UD Choubey, director general, Scope, a representative body of CPSEs, spoke to FE?s Noor Mohammad about merits and demerits of the new proposal. Excerpts:

Do you see any possibility that the government would raise a decent amount through the disinvestment route?

Almost every year, the government has been fixing a target for disinvestment in public sector enterprises. For 2010-11, the government had set a target of R40,000 crore, but could mop only R22,762.96 crore despite comparatively better market conditions. This year, i.e. in 2011-12, the government again had set a target of R40,000, and so far only R1,144.55 crore has been raised.

With just three months left in this financial year, the target is unlikely to be met, as the market has been volatile and uncertain. Since the stock markets cannot be trusted to give good returns, the investors sentiments are at an all-time low.

The government is considering a proposal by which cash-rich PSUs would buy back its shares; this will help it meet the disinvestment target for the current fiscal? What do you think about this proposal?

At present, the government is considering a buy-back mode under which it can raise money by selling equity in the company to the PSE itself. About a dozen cash-rich companies like Coal India, SAIL, NMDC, ONGC and NTPC are on the government’s radar.

However, PSEs are not really excited about the proposal as they have their own plans of expansions and acquisitions. In the backdrop of a global slowdown, these PSEs feel that it would be difficult for them to raise financial resources from the market for funding their capital expenditure plans.

What are the PSEs? reservations about the share buyback proposal?

Most of the Central PSEs are competing in the global market. They have elaborate plans of investments. The power sector PSEs are gearing up to add about 1,00,000 MW during the 12th Five Year Plan (2012-17). The investment in the sector is pegged at R13.72 lakh crore. Coal India is keen to employ its reserve cash to expand its production, and acquire companies and mines overseas. It plans to invest about R30,000 crore in the 12th Five Year Plan i.e. R6,000 crore annually from FY13-17.

In the case of manufacturing PSEs, their cash surpluses are not large in relation to their investment plans while a company like Power Grid needs the cash for expanding its infrastructure of transmission capacities. Oil & gas companies also have the requirement of huge capital for exploration, production and infrastructure.

Cash reserves serve as a buffer for companies during tough market conditions. It would not be prudent for the government to strip PSEs of their cash reserves.

How will it affect the investor sentiments?

Any proposal should be investor friendly. The share buy-back scheme could adversely impact investor sentiments at a time when the stock markets are already depressed. It is important to safeguard the interest of small investors.

How does the proposal gel with corporate governance principles?

The proposed scheme raises serious concerns in the area of corporate governance, as the decision about what to do with their cash holdings should be left solely to the the boards of public enterprises. They may desire to buy some businesses or expand into related businesses or make portfolio investments, and it is not difficult to see that their decisions would be completely different from those of the government. In effect, this proposition undermines the capabilities and authority of the board of directors who are competent enough to take such decisions after considering relevant factors, which may be different for each PSE.

What are the credible options that the government can consider?

An option that government may consider exploring can be cross-holding i.e. PSEs buying one another?s shares. This was attempted first time in 1998-99 when three oil sector enterprises i.e. GAIL, ONGC, and IOC mopped up about R5,000 crore. Over the years, above cross-holdings have proved to be profitable, showing that equity investment by PSEs in each other generates value over a period. Cross-holding is a better route than share buyback for the disinvestment of government’s stakes in PSEs.