With the fate of the disinvestment programme still hanging in the balance, the department of disinvestment (DoD) has reportedly finalised plans to allow government institutions, including banks and firms such as LIC, to buy the government?s stake in Central Public Sector Enterprises (CPSEs) with the help of bulk sales.
However, the jury is still out on the efficacy of this approach. ?Allowing government institutions to buy stake in CPSEs might make sense if there is a strategic intent on the part of the institutions buying the stake. But at the end of the day, this seems to be just a fund-raising exercise minus any strategic intent,? said Amit Tandon, managing director of Institutional Investors Advisory Services (IIAS).
Tandon also pointed out that there are regulatory guidelines that restrict banks? equity exposure and the public sector banks may not be able to buy a meaningful stake in the CPSEs.The DoD also wants cash-rich CPSEs to go for share buybacks. Besides, the money accrued from the dissolution of the Specified Undertaking of UTI (SUUTI) could also be used for buying shares of CPSEs.
Buybacks are a better way to raise money compared with cross-holding or bulk sales as the money lying idle with the public sector units can go back to the government, say market participants. ?This will be a much healthier option. There will be a one-time payment, the portfolio remains clean and the minority shareholders will be much happier,? said Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services.
However, Tandon believes that buybacks should be used only when there?s no alternate use of cash available or if the prospect of good returns from new projects is sufficiently low. ?A lot of companies may have their own capex plans and using money for buybacks may not be the best utilisation of the company?s resources.?
According to a report by Kotak Institutional Equities, from an investor?s perspective, while the purchase of other state-owned entities remains a less-preferred option, a similar exercise undertaken in the late 1990s did not erode shareholder value for the investors.
According to reports, a Cabinet note on the buy back of shares by PSUs, has been floated by the department of disinvestment for inter-ministerial consultation and ten public sector units (PSUs) are to be shortlisted. The government is understood to be considering three options to raise close to R46,000 crore; strategic cross purchases amongst PSUs, the buyback of shares by PSUs and also monetising the assets of Specified Undertaking of the Unit Trust of India (SUUTI).
Clearly, cash-rich PSUs will be picked out, especially those that have abundant cash reserves even after factoring in 50% of the amount for capital expenditure. Potential candidates include CIL, Oil India , ONGC , NTPC , NMDC and SAIL. The biggest assets in SUUTI include an 11.6% stake in ITC, 8.3% in L&T and a 23.4% stake in Axis Bank. Although the government had hoped to raise R 40,000 crore from disinvestments this year, it has not been able to make much headway given the weak market conditions.