PFC, NTPC stake sales hit borrowing clause hurdle

New Delhi: The government is facing hurdles in trimming its stakes in Power Finance Corp. Ltd (PFC) and NTPC Ltd, as the companies may breach a bond covenant that requires the companies to be majority-owned by the government.

Reducing the government’s stake to less than 50% will also increase overseas borrowing costs for these companies, as they will lose their quasi-government status as borrowers.

NTPC and PFC are among state-run companies in which the government plans to reduce its stake by selling shares through its two exchange-traded funds (ETFs), a basket of securities that trade on exchanges. The government sells its stakes in listed central public sector enterprises (CPSEs) through the CPSE ETF and Bharat 22 ETF.

“We don’t have the necessary headroom now to raise a big amount through ETFs. We have asked the administrative ministry to examine the legal matter of bringing the stake below 50% in NTPC and PFC,” a finance ministry official said on condition of anonymity. “If it is an expensive and time-consuming proposition to get the clearance from overseas market regulators, then we will take out the two stocks from the ETFs.”

A former NTPC official said that when the power producer sold overseas bonds, it gave an undertaking that if the government stake in the company comes down below 50%, then investors can withdraw their money. “NTPC has raised funds through bond issues worth ₹70,000 crore, planning for a period of 10 years. If investors start asking for their money back, then the company has to be closed down. That’s why the government is not sure how to bring its stake below 50%,” the former official said on condition of anonymity.

PFC and NTPC, besides other companies in which the government owns more than 50%, enjoy the status of quasi-sovereign borrowers. The implicit guarantee of the government reduces the cost of borrowing by selling bonds. Reducing the government’s stake to below 50% will increase the cost of selling bonds for these companies as investors will seek higher yields for the additional risks they take.

In September, PFC had scaled up the quantum of funds to be raised through overseas bond sales to $5 billion from $3 billion under its Global Medium Term Note Programme. In April 2017, NTPC had raised ₹2,000 crore through masala bonds under its $4 billion medium-term note programme for capital expenditure.

The Cabinet Committee on Economic Affairs on 20 November approved a proposal to bring down its stake in select CPSEs to under 51% on a case-to-case basis.

The government’s stake in NTPC has come down from 56.4% in June to 54.5% at the end of the September quarter, while in PFC, its stake has reduced from 59.05% in June to 56.16% in the September quarter.

Industry lobby Ficci, in its pre-budget memorandum to the finance ministry, has urged it to go for privatization rather than partial disinvestment as the latter does not find much interest among investors. “The government should announce a five-year plan to reduce government stake in PSUs (public sector undertakings) with the idea of keeping the Maharatnas and key strategic companies, and selling the rest,” it said.

The government has garnered ₹17,364 crore from disinvestment till November, around 82% ( ₹14,369 crore) of it has been accrued from the index funds and not from stake sales, indicating a heavy reliance on ETFs to meet the disinvestment target.

Out of the ₹14,369 crore, ₹10,000 crore was raised through CPSE-ETF and ₹4,369 crore through Bharat-22 ETF.

On 26 December, Mint reported that the government’s disinvestment target might fall short by ₹40,000-50,000 crore as it was unlikely to complete the privatization of Air India Ltd, Bharat Petroleum Corp. Ltd and Container Corp. of India Ltd by March-end.