Buy back or cross hold? Govt gets market jitters

In a new twist to the government disinvestment programme, finance secretary R Gopalan on Wednesday hinted at a share buyback by public sector companies. The uncertain market conditions are not giving the government enough confidence to go for public offers of its companies but an imminent revenue gap has made it tough to give up the Rs 40,000 crore disinvestment target.

Though the government has not taken any final decision on the buyback proposal, it is looking at the option of asking cash-rich companies to buy government holding in peers. Speaking to reporters on Wednesday, economic affairs secretary R Gopalan said, “There are many options.

There can be equity shrinkage. Our aim is to achieve Rs 40,000 crore (disinvestment target). You can buy back equities, you can go for public offers. We are not going to revise our (disinvestment) target as on date.” However, later in the day, he hinted that the proposal to make government-owned companies buy back shares was at a conceptual stage.

CASH & BANK BALANCE OF TOP 15 PSUS
	Cash & bank (Rs cr)*	Govt stake  (In %)#
Coal India	45,862.28	90.00
ONGC	28,688.26	74.14
NTPC	17,859.83	84.50
SAIL	17,747.76	85.82
NMDC	17,228.06	90.00
Oil India	11,771.40	78.43
BHEL	9,706.40	67.72
MMTC	6,846.68	99.33
Bharat Elec	6,536.76	75.86
MTNL	4,892.08	56.25
Power Grid Corp	4,805.87	69.42
Neyveli Lignite	4,423.99	93.56
NHPC	4,265.31	86.36
National Aluminium	3,795.23	87.15
GAIL	2,584.35	57.34
*For FY11; #as of June ‘11 Source: Bloomberg Compiled by BS Research Bureau

The government is facing a challenge in meeting its fiscal deficit target of 4.6 per cent this year. “There is a political commitment to maintain fiscal deficit at this level. We will try and see to how maintain it at 4.6 per cent.
 

DISINVESTMENT DILEMMA

* Only Rs 1,100 crore raised so far this year from Power Finance Co

* Volatile stock markets cast serious doubt over stake sales

* Interest rate hikes slow down industrial growth

* Top 100 companies’ advance tax payment growth down to 10% in Sept from 18% in June

* GDP growth for 2011-12 projected below 8%

* Pressure to meet fiscal deficit target of 4.6%; market expects it to cross 5%

* Rising oil subsidy bill, Rs 20,000 crore budget allocation used to clear 2010-11 balance

* OMCs’ under-recoveries to touch Rs 1.2 lakh crore in 2011-12

Gopalan’s statement of the finance ministry sticking to the number could be interpreted as the government considering buyback and crossholding options along with a cut in the securities transaction tax rate. Stock market analysts and companies themselves do not prefer the first option since it will knock off cash from their books. They prefer a cut in STT, though it will mean a further dent in government revenue. 

The cut in crude and excise duties on petroleum has already left a hole of Rs 24,000 crore in the government kitty.

A senior executive in one of the companies scheduled for disinvestment this year said both buyback and crossholding would require fresh cabinet approval. "The proposals would need to be cleared by the government as promoter and then require approval by the company's board. It would also need vetting by other shareholders," he said.

On the issue of cash infusion in the State Bank of India, Gopalan said it would happen during the financial year though he did not mention any specific time frame.