As part of its plan to meet the fiscal deficit target for FY19, the government is looking at asking some large PSUs to purchase its stakes in other state-owned entities, but this sort of ‘disinvestment’ would entail a much higher level of public borrowing than the deficit number would reflect.
In what could be a repeat of ONGC-HPCL deal last year, Rural Electrification Corporation (REC) may be nudged to acquire the Centre’s 65.64% stake in Power Finance Corporation (PFC). However, since REC’s current cash surplus is just Rs 1,774 crore, it would need to raise a big amount from the market to fund the acquisition, which at current market prices is seen to be Rs 16,800 crore plus a likely premium.
For the sale of the Centre’s HPCL stake to ONGC last year, reference valuation was at a 14% premium, which fetched the Centre a whopping Rs 36,915 crore. The upstream oil firm financed the deal with market borrowing of Rs 25,000 crore. If the premium is kept at the same level and assuming the market prices are same as today when the deal materialises later in the year, the government could get nearly Rs 19,000 crore from REC’s purchase of its stake in PFC.
On Monday, the PFC stock closed at Rs 96.85, up 12.16% from the previous close.
Analysts feel such deals between PSUs are not markedly different from budgetary borrowings by the Centre and could hence put pressure on bond yields.
With its finances under stress and an obligation to sustain the public spending momentum, the Centre has lined up plans to raise a massive Rs 1.7 lakh crore via the extra budgetary resources (EBR) in the current fiscal, up 110% from FY18.
These EBRs are being used to fund its programmes such as Swachh Bharat Abhiyan, higher education programmes and even to meet the subsidy obligations.
While the Centre is on record to state that the fiscal deficit target of 3.3% of the GDP would be met, the increased chance of the nominal GDP growth being lower than the budgeted rate of 11.5% itself would make the task more difficult.
The surplus cash of REC has dwindled from Rs 4,490 crore in FY17 to `1,774 crore in FY18 as it has paid handsome dividends and issued bonus shares in the ratio of 1:1, in accordance with the government’s capital management rules to give optimum reward to shareholders. PFC also saw its surplus slump to `553 crore from `3,573 crore during the period.
Even though the government is running behind schedule for a large PSU deal similar to last year’s ONGC-HPCL one — a deal like this takes nearly six months for completion — officials are hopeful that it still doable as some of the preparatory works such as appointment of a merger and acquisition adviser (ICICI Securities) are already complete.
Racing against time to mobilise a whopping Rs 80,000 crore in disinvestment revenue in the current fiscal (so far only 19% of this raised), the power ministry has been asked to moot a proposal soon for REC-PFC deal so that the transaction could be completed by March 2019.
Power minister R K Singh met finance minister Arun Jaitley late last week to apprise him about risks that could arise due to consolidation of REC and PFC. As both the firms are similar in size and in business that are related, there could administrative and integration issues, the power ministry feels.
The original plan, curiously, was for PFC to buy REC, but it was reversed as receipt to government in that case would have been lower. The Cente’s 57.95% stake in REC is now worth about `12,000 crore.
Last year, the ONGC-HPCL deal helped the FY18 disinvestment revenue to touch a record high of Rs 1 lakh crore, helping the Centre to minimise fiscal deficit slippage to 33 basis points. Fiscal deficit last year turned out to be 3.53% against the original target of 3.2%.
In an otherwise stressed sector, both REC and PFC reported robust profits in FY18 and paid hefty dividends.
PFC reported net profit jump of 175% to Rs 5,855 crore in FY18 and paid a dividend of 78% of its paid up capital. Even though REC net profit declined by 26% y-o-y in FY18, it still made `4,647 crore.
For the record, the REC-PFC deal is in line with the government’s policy of creating public sector behemoths by consolidating firms based on commonalities of functions to draw the benefits of economy of scale, global competitiveness and access to cheape