Divestment gameplan: LIC, PSU banks to the rescue?

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Divestment gameplan: LIC, PSU banks to the rescue?

The cabinet note on divestment proposes that LIC and PSU banks buy between 5 to 10% stake in PSUs. The note also recommends buybacks and cross holdings, reports CNBC-TV18’s Aakansha Sethi.

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The cabinet note on divestment proposes that LIC and PSU banks buy between 5 to 10% stake in PSUs. The note also recommends buybacks and cross holdings, reports CNBC-TV18's Aakansha Sethi.

There is a Rs 40,000 crore disinvestment target. Of which, the government has met only about 3%. With the fiscal deficit target of 4.6%, they have been very worried about how they are going to generate that Rs 40,000 crore revenue. So, they have been looking at alternate strategies.

Now, the Department of Disinvestment has floated a cabinet note for inter-ministerial consultation. The cabinet note proposes three things.

The first is that LIC and PSU banks be allowed to buy stake in PSUs. Infact it asked for the Department of Disinvestment to be so empowered that it can sell stakes on behalf of central PSUs to LIC and PSU banks.

The note says that these financial institutions have large investable funds. If they buy directly from the market, they will buy these shares at a higher price and the government will not get any money. So, through the tender route these can be sold to LIC and PSU banks to generate that extra cash.

The other thing it proposes is cross holdings and buybacks in PSUs. It says that the Department of Disinvestment be allowed to sell stake to PSUs and arrange for cross holdings and buybacks.

The condition it lays are that in the cases where the cash surplus of a company is more than its annual turnover, the company buys back 10% equity. In the cases where the cash surplus is 50% of the annual turnover, the company buys back 5% of equity.

According to this criteria, about seven-eight PSUs qualify. These include Oil India , NHPC , NMDC , Coal India , Manganese Ore and Neyveli Lignite .

The cabinet note does not specifically ask for a particular companies in which buyback should be considered, but just asks for a broad approval.

However, the key question is that should the government fiscal profligacy financed through PSUs cash surpluses. Also, one year after you have done an IPO in Coal India, is it wise to go ahead with a buyback in equity just merely to finance your fiscal deficit. Those are tough questions that the cabinet will have to answer when this not comes up for approval two-three weeks from now.