Centre may return to OFS for divestments

Buybacks may lose appeal as PSU stocks rebound

With rebound in share prices of state-owned companies in recent months, the government is rethinking on a plan for public sector units buying back their stocks from the Centre (promoter). It is, instead, looking at a secondary market offering, said investment bankers in the know.

Some public sector undertakings (PSUs) where the government was considering buybacks — such as MMTC, Bharat Heavy Electricals and Regional Engineering Corporation — have seen share prices rise 45-55 per cent from this year’s low.

Investment bankers said offer for sale (OFS) would now be the preferred disinvestment route. Unlike a follow-on public offering (FPO), where companies can raise funds by issuing fresh shares or promoters can sell their existing stakes, or both, OFS is used only when existing shares are put on the block. Only promoters or shareholders holding more than 10 per cent of the share capital in a company can come up with OFS.

The BSE exchange's PSU index is up nearly 40 per cent from the 2016 low on February 29, the Union Budget day. In comparison, the benchmark Sensex has gained 23 per cent.

“Buybacks can be used only when market sentiment is poor and the particular PSU has excess cash,” said a banker who is part of the PSU divestment process. When this is not so, there is a problem. For instance, the proposed buyback in National Aluminium, of Rs 2,835 crore, would drain more than half the company's cash reserve. The government had also proposed a buyback in NMDC worth Rs 7,528 crore; the company had cash of Rs 14,811 crore at the end of FY16.

Another downside with buybacks is the lock-in period. By the Securities and Exchange Board of India regulations, a company is not allowed to access capital markets for six months after this takes place.  Nor do buybacks widen the investor base.

The government had considered buybacks after several OFS issues it had launched in 2015 received lacklustre response, due to adverse market conditions. It had to be rescued by Life Insurance Corporation of India (LIC). For instance, in the Rs 9,369-crore OFS of Indian Oil Corporation, 86 per cent had to be picked up by LIC. In NTPC’s OFS worth Rs 5,014 crore, LIC had bought 60 per cent of the shares on offer.

In the Union Budget, the government had set a divestment target as Rs 56,500 crore for FY17. Of this, Rs 36,000 crore is estimated to come from minority stake sales in various PSUs and the remaining Rs 20,500 crore from strategic sale in various companies. Of this, the government has managed to garner only Rs 3,183 crore till date, with Rs 2,716 crore from an OFS in NHPC.