There is a government in a tight fiscal spot on one hand and a huge corporate cash pile on the other. Is it time for the twain to meet?
It is now increasingly clear that the Manmohan Singh government will be unable to meet its Rs40,000 crore disinvestment target for the current fiscal year. It has managed to sell a mere Rs1,145 crore of public sector shares so far.
One fallback plan has been spelt out in a white paper on disinvestment prepared by ICICI Securities and the department of disinvestment. The white paper suggests a buyback of shares in 10 major public sector units (PSUs). It also suggests that these cash-rich companies buy shares in each other, through cross holdings. The end result will be more cash in the government kitty, at a time when the fiscal deficit is threatening to be far larger than what was budgeted for earlier this year.
At current market prices, a 5% buyback of the government stake in ONGC will earn the exchequer around Rs10,800 crore. ONGC has a cash balance of Rs28,688 crore. A similar deal in Coal India, which has a cash reserve of Rs45,862 crore, would provide Rs9,400 crore.
The raids will provide some immediate succor to the government, but will also be strategically myopic in a country that is under energy stress. ONGC should be using its cash, for example, to buy oil assets abroad through its subsidiary ONGC Videsh. Coal India should be using its cash to ensure that domestic coal supplies improve. Through the government budget, the cash they hold will be used to fund subsidies rather than create assets.
The case of cross-holdings is even stranger. The National Democratic Alliance government had pulled off a similar accounting trick to massage the budget numbers. Investors had beaten down the shares of these companies in protest. The parties who were then in opposition had also attacked the policy. The United Progressive Alliance overturned the decision when it came to power in 2004.
Indian politicians are no strangers to opportunistic U-turns. The Bharatiya Janata Party has done one on the issue of foreign direct investment in retail. The Congress is now doing one on PSU cross-holdings.
Most of the large PSUs are now listed on the stock exchange. They have non-government shareholders. The minority shareholder seems to have been forgotten in all these proposals. Nobody cares whether they would rather have the cash used to buy assets or pay down debt or invest in new projects.