PSUs may be lured with board seats to push cross-holding

Left with few avenues to boost revenues and rein in runaway fiscal deficit, the government proposes to revisit the option of allowing small cross-holdings among cash-rich PSUs. It, however, seeks to ward off criticism over the move, touted as mere financial jugglery, by enabling these PSUs to get seats on each others? boards.

The government does not want to be seen as forcing these PSUs? hands, but hopes to lure some of them by arguing that influence from board positions would come in handy for these companies, many of which (like SAIL and Bhel/NMDC or NTPC and Coal India) do business with each other. The cross-holdings plan, the brainchild of former finance secretary Vijay Kelkar, was attempted by the NDA government in 1998 among profitable oil PSUs. It was, however, undone five years later by the same political dispensation, citing conflict of interests among these PSUs which had their own growth plans.

Cross-holdings will reduce the government?s direct holdings in the respective PSUs, but will enrich its coffers and help meet the immediate goal of improving its balance sheet.

Sources said that in a Cabinet note, the finance ministry?s disinvestment department has proposed cross-holdings and options other than public issues to raise R40,000 crore, which is still the official divestment target. The Cabinet will consider these proposals in early December. In a slumping market, it is next to impossible for the government to raise revenues by selling shares of state-owned enterprises through initial share floats and follow-on offers.

One option under consideration is nudging PSUs with cash surpluses like Coal India, ONGC, NMDC, SAIL and Oil India to buy back part of their stake from the government at market prices. The deal won’t be transacted through stock exchanges. As no fresh shares will be issued, this would lead to a shrinking of the companies’ capital base which, the government reckons, will benefit existing shareholders. But again, there is the question of propriety of the plan as it precludes minority shareholders and, therefore, requires clearance from market regulator Sebi.

At current market prices, a buyback of 5% government stake by ONGC will earn the exchequer some R10,800 crore. A similar deal for Coal India will mobilise R9,400 crore for the fiscally-stressed government.

An exclusive deal like this for promoters in a listed private firm inevitably raises serious corporate governance issues, which the government realises. ?(Meeting) the disinvestment target is important but at the same time, the government would ensure that existing PSU shareholders don’t suffer,? said a senior government official.

Struggling to meet the 4.6% fiscal deficit target in the economy beset by slowing growth and rising import costs, the government is trying to hard-sell these ideas for milking PSUs.

Comparing the new proposals and public offers ? like initial floats and follow-on share sales ? the official quoted above said the latter would put the markets under pressure and share prices could fall, impacting existing shareholders. ?In order to create new shareholders, should we let existing shareholders suffer?? he asked, seeking to counter criticism over the proposal to allow PSUs to cross-hold each other’s shares and the buyback option.

?We have been persistently building confidence in our PSUs that government, as the majority stakeholder, will respect their autonomy. But at the same time, we don’t want to forgo our right as a majority shareholder,? the official said.

Says Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities, ?The proposals won’t allow optimum utilisation of resources and may run into regulatory hiccups. Besides, not just qualified institutional investors but foreign investors in these firms too will like to have a say in the process. Further, as retail investors won’t be able to participate in the process, this is not disinvestment in the true sense.?

According to Ashvin Parekh, partner and national leader (global financial services), Ernst & Young, board representations could help smooth transactions between two public sector entities, like NTPC and Coal India for instance.

As per the government’s plan, the cross-holding of one PSU in another will not be more than 10%. This would ensure that PSUs don’t drain up their reserves too much and will have enough to fufil their investment obligations even after these deals.

The government has so far managed to raise only Rs 1,162 crore through disinvestment this fiscal.