Yet another plan to help the government bridge its yawning budgetary gap has now caught the attention of the bond market.
Bloomberg reported on Thursday that the government plans to borrow $9.5 billion from banks by offering its assets as collateral. Business Standard had also reported about the likelihood of such as move earlier this month.
The assets on offer will be what were transferred to a special investment vehicle that was created during the liquidation of the US64 scheme of the Unit Trust of India at the turn of the century. The Specified Undertaking of the Unit Trust of India (SUUTI) owns significant stakes in well-run companies such as ITC, Larsen and Toubro and Axis Bank. The value of the government stake in these three companies through SUUTI is around Rs 35,000 crore.
The new plan follows news reports about other innovative ways to tackle fiscal stress, including buybacks of shares by cash-rich PSUs and increase in cross holdings, as suggested by investment bank ICICI Securities. The Indian government is now perhaps planning to follow the path trod by many domestic promoter groups that raised money from banks by pledging their shares, a risky strategy as subsequent events have shown.
All this fiddling is short-sighted. It would make far more sense for the government to sell its stake. The public markets may not have an appetite for large share sales right now. But the government should consider block sales to financial investors. Getting in strategic investors may be more difficult in the present political climate because it would lead to a change in managements, which is not a bad idea but one that is impractical right now. However, private equity investors would be more than happy to buy large slices of three well-run companies.
Mint had reported last week that the government has already reached out to the Securities and Exchange Board of India for permission to offload stakes to less than 49 investors, though it wants such firms to be listed after the share sale. This move is in an attempt to quickly raise money to meet growing budgetary problems.
The share pledge may be a smart tactic right now, but the best option in the long term is for the government to make a clean sale of its stakes in ITC, Larsen and Toubro and Axis Bank.