Bangalore: The Union government is likely to reserve part of a planned initial public offering (IPO) in Cochin Shipyard Ltd, India’s biggest shipbuilder under state control, for employees to quell any potential union opposition over the fund-raising plan.

Cochin Shipyard is one among a list of state-run firms identified by the government for an IPO. The yard already has the backing of the shipping ministry to sell shares to fund an expansion plan worth Rs800-1,000 crore.

Building blocks: A ship being built at the Cochin Shipyard. Money raised through an initial public offering will go to the company and that from a secondary share sale to the government.

“The proposal to give stock options is being considered to retain workers and also to soften their opposition to a stake sale," said N.M. Paramesh, finance director at Cochin Shipyard, confirming the shipping secretary’s statement.

The proposed IPO will test the Manmohan Singh government’s resolve to sell stakes in state-owned firms located in Kerala, a state known for its strong unions and being a communist bastion. The state government is led by the Communist Party of India (Marxist), or CPM, which fought against the Congress-led ruling coalition at the Centre in the April-May general election. The CPM and other Left parties have previously opposed plans by the government to sell shares in state-run companies.

The government will piggyback on the IPO to sell its shares in the market, a Union shipping ministry official said. The quantum of the government’s shares to be sold in the IPO will be decided by the cabinet, he said on condition of anonymity.

Money raised through the IPO will go to the company and that from a secondary share sale to the government.

An IPO would make Cochin Shipyard the first state-owned shipbuilder to be listed on the bourses.

Central government-owned firms located in Kerala do not have any significant retail investors.

Kochi-based fertilizer maker, the Fertilisers and Chemicals Travancore Ltd, or FACT, for instance, is 98.10% owned by the Central government, with the balance held by financial institutions, banks and insurance companies.

Many of Cochin Shipyard’s engineering and design staff have been poached by private shipbuilders, both existing and new ones, as they expanded capacities to cater to demand.

“Quite a few senior staff have left Cochin Shipyard over the past 18 months," said another executive of the firm. Whether the stock options will be given from the government’s portion of the share sale or from the fresh issue will be decided by the cabinet, this executive said.

Cochin Shipyard has suggested the fresh issue of some 240 million shares with a face value of Rs10 each. “The IPO size will depend on the valuation," he said.

Last month, Pipavav Shipyard Ltd sold 85.5 million shares at Rs58 each to raise Rs496 crore.

Cochin Shipyard has an order book for constructing 20 ships estimated at a value of Rs5,000 crore. At least half the order value is made up by the Indian Navy’s order for an air defence ship, India’s first indigenous aircraft carrier.

The yard is diversifying into building higher-end ships equipped with diesel propulsion. Cochin Shipyard also recently signed a memorandum of understanding (MoU) with IHC Holland Merwede BV, the world’s top dredging equipment maker, to jointly bid for projects to build dredgers. “According to the MoU, IHC will share technology with Cochin Shipyard so that we can build dredgers in our yard," said V. Kala, company secretary and public information officer at Cochin Shipyard.

Dredgers are specialized ships used to deepen and maintain the channels of ports and harbours.