Govt explores buyback & cross holdings route to achieve fiscal targets

In the Union Budget of 2011-2012, the govt. had planned to raise Rs 40000 cr through the disinvestment route in FY12, to meet its funding requirements. It also committed to retain at least 51% of its holding in public sector undertakings (PSUs).

However, due to volatile market conditions, the govt. has been able to raise only Rs 1150 crore approx. in the first 8 months of this fiscal through the FPO of Power Finance Corporation. As the govt. is finding it difficult to achieve its targets by the year end, it is exploring means like the buyback of shares and cross holdings to help the situation. We, at DSIJ, feel that such steps will help the govt. in achieving its targets, and will also benefit the other stakeholders.

The govt. is also planning a buyback option, wherein PSU companies will buy back the shares held by the govt. With the buyback option, the shares get forfeited. As a result, the Earnings Per share (EPS) of the company improves, which is beneficial for other shareholders. The govt. has asked the LIC to pick up a 5%-10% stake in some of the PSU companies. This would be beneficial for LIC, as some of the companies have strong fundamentals and are also available at very good prices.

As per the media reports, the Department of Disinvestment has already floated a cabinet note, seeking to ask cash rich companies to buy back shares in their PSU peers. Further, it has reported saying that companies having a cash surplus equal to or more than 50% of their annual turnover will buy back 5% equity, while those having a cash surplus greater than their annual turnover will have to buy buyback 10% of their stake. The table below shows a list of PSU companies falling under this category (data as on March 31, 2011).

However, we feel that the govt. will face time constraints in this regard, as only 4 months remain in this fiscal. Buyback and cross holdings will not solve the complete problem of meeting the targets, and we feel that the govt. will have to disinvest from some companies. Bringing on the FPOs of ONGC, SAIL, Hindustan Copper etc., will further help in achieving the goals.