Divestment blueprint targets strategic sales after buyback
3 min read 16 May 2016, 02:35 PM ISTFinance minister Arun Jaitley says cash-rich PSUs could go for share buyback when prices are low and sell stakes when market improves
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New Delhi: Outlining the government’s disinvestment strategy, finance minister Arun Jaitley said on Monday that cash-rich state-run companies could buy back their shares from the market, followed by strategic stake sales once the market improves.
The government has set a disinvestment target of â‚ą 56,500 crore in 2016-17. Of this, â‚ą 36,000 crore is expected to come from minority stake sales and â‚ą 20,500 crore from strategic stake sales.
Jaitley said the markets were extremely volatile last year. “Hopefully the markets stabilize this year," he said, adding that some public sector undertakings could look at a share buyback when prices are low.
So far this year, the BSE’s benchmark Sensex is down 1.78%, after losing 5% last year.
“Lot of the units are very cash rich and can afford a buyback. We can thereafter have strategic sales," he said at an interaction organized by the Indian Women’s Press Corps.
“I had a discussion with the tourism ministry and the aviation ministry for strategic sales in hotels where they have stakes. Some state governments also have stakes. That process is being worked out," he said, expressing hope that the government will meet its targets this year.
In 2015-16, the government had set a record target of raising â‚ą 69,500 crore through disinvestment, but only managed â‚ą 32,148 crore in divestment receipts. To avoid a repeat of last year, it is exploring a new strategy.
A total of 34 central public sector enterprises (CPSEs) hold about ₹ 1.8 trillion in cash and equivalents—a cash pile that may come in handy as the government pushes some of these firms to consider share buybacks.
A senior executive at a top domestic investment bank advising the government on its divestment strategy said the buybacks provide another option for raising money in the light of weak market conditions and low appetite for government stock.
Coal India Ltd, the world’s largest coal producer, had more than ₹ 53,000 crore in cash as of the year ended March 2015. NMDC Ltd, Oil and Natural Gas Corp. Ltd and NTPC Ltd together held ₹ 50,000 crore as of March 2015, according to Capitaline, a financial database provider.
“Any offer price below the market price will not encourage small shareholders to participate in the buyback option as there is another option of selling shares in open market. However, a lower price will in turn boost the intrinsic value of the stock price and will be positive for long-term investors," said J.N. Gupta, managing director, Stakeholders Empowerment Services, a proxy advisory firm.
The finance minister also expressed hope that bad loans in the Indian banking system have peaked and the situation will improve in the coming months as stressed industrial sectors turn around.
“With the provisioning in the last few quarters taking place, at least transparency has come about. You cannot conceal the balance sheets of the banks. So, whatever was the actual position, it has peaked and all the steps (are) taken as far as different sectors are concerned," Jaitley said.
“Once the sectoral balance sheet improves in some of the sectors, I think it (non-performing assets) will start tapering down and therefore, the peaks probably have been reached or thereabout."
He pointed out that sectors such as steel, highways, power and sugar have been under stress and exposure to them is being reflected in the banks’ balance sheets.
Listed banks added more than â‚ą 1 trillion in bad loans to their balance sheets in the quarter ended December 2015. This trend is reflected in the performance of state-owned banks that have disclosed their results so far for the March quarter. Most of them have reported a sharp increase in non-performing assets as well as reported losses.
Sounding an optimistic note on growth prospects, Jaitley said that a revival in rural demand could help in reviving overall economic growth. He also reiterated the government’s intention to maintain the reform momentum.
“If you look down the tunnel, a moderate level of oil price, monsoon and the consequential impact of reduced sectoral stress in steel, highways, sugar and power, and a plausible impact over the next few quarters over balance sheet of banks, these could be a positive and therefore can add to your present growth," he said.
Good rainfall will not only add to agriculture, but also to rural demand, he said. “Therefore, rural demand has the capacity to push up private sector because of increased demand itself. So far, (monsoon) indications are positive," he said.
“Having cleared the Bankruptcy (Code), I have at least 4-5 (reform) proposals pending and 1-2 more which we are working on," he added.
PTI contributed to this story.
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