In order to maximise the proceeds from disinvestment, the Centre plans to dip into the reserves of public sector units (PSUs) before listing them on the bourses, a plan that is not being viewed too positively by some state-run firms.
The government plans to issue bonus shares to the existing shareholders of a company? having large reserves? before diluting its stake. Since the bonus issues are being contemplated prior to a public offering, the biggest beneficiary in this exercise will be the government itself.
In case a disinvestment candidate has reserves more than three times its paid-up equity, the government will consider issuing bonus shares, officials said. This helps the government capitalise a portion of the reserves before a public offer.
?The criterion is that where reserves are three times of paid-up equity of a company, it can issue bonus shares. For example, in the case of Engineers India Ltd (EIL), where we are issuing bonus shares, this ratio is around 20 times,? a senior official told FE .
While approving a 10% follow-on public offer in EIL, the government decided that before the offer, EIL would issue two bonus shares for every one share held by existing shareholders. The government also announced a special dividend of 1000% of the paid-up equity capital as well as a stock split for EIL.
As many as 22 companies, satisfying the disinvestment criterion framed by the Union Cabinet, have reserves to paid-up equity ratio of more than three, according to an FE analysis of the Public Enterprises Survey 2007-08, the latest data available on PSEs. These companies, therefore, are potentially eligible for a bonus issue.
For companies such as Coal India Ltd and Hindustan Copper?wherein a stake sale is being planned for the next fiscal?this ratio, though, is less than three.
Some state-owned companies, however, are opposing the government?s demand for the bonus issue, arguing this will adversely affect the share price, according to executives at two power companies selling stakes. ?They (the government) asked us to issue bonus shares saying that since your reserves to paid-up equity ratio is 10, but we objected,? said a senior executive at one of the power companies that is planning a share sale. ?Bonus shares should normally be issued when we are witnessing consistent growth, then some of the reserves can be capitalised. Now that the business cycle is weak, nobody will like it. Plus, it will hit the EPS (earning per share),? he added, asking not to be quoted.
Indeed, the government can only ask the PSUs to explore the option of bonus issue but not ?mandate? them, according to the department of public enterprises (DPE) guidelines on bonus shares. When contacted by FE , DPE secretary Bhaskar Chatterjee pleaded ignorance on the issue.
Some analysts are skeptical whether issuing bonus shares is a viable proposition at this juncture, especially since the NTPC 5% stake sale has not been lapped up as aggressively as was expected.
The overall collection will be 10-15% lower than what was expected for NTPC share sale, said Ambareesh Baliga, vice president of equities at Karvy Stock Broking. The premium on the NTPC stock price could settle at only 4-5%, as compared to the expectation of 10-15%, said Jagannadham Thunuguntla, equity head, SMC Capital.
Finance minister Pranab Mukherjee, slated to unveil the Union Budget 2010-11, will use disinvestment as a bulwark against the 16-year high fiscal deficit projected at 6.8% of GDP. The proceeds from disinvestment are even more crucial now that the Rs 35,000 crore anticipated revenue from 3G spectrum auction is unlikely to happen this fiscal.
The government plans to complete four public offers, of NTPC, NMDC and REC by March 2010. About 60 companies fit the disinvestment criteria and the Centre is hoping to fetch over Rs 22,000 crore through stake sales within this fiscal. The government recently raised about $2 billion through share sales of NHPC and Oil India.
Thirteenth Finance Commission chairman Vijay Kelkar has estimated that all central PSUs have a value of $300-400 billion, while Morgan Stanley has pegged the valuation of unlisted public sector firms at $144 billion.