Divestment is a word that will be used frequently in this article. It is the literal opposite of investment. In economics, the term is used specifically to indicate reduction of assets. The objective of such a reduction is purely financial although there may be other reasons involved in special cases. A particular firm resorts to divest its assets when:
• To improve focus on its primary business, a firm may divest the allied businesses owned by it
• Divestment is a common practice to generate funds. Evidently selling of an allied business will ensure cash flow which may be used for a number of purposes including settlement of outstanding debts
• Sometimes selling off the individual assets owned by a firm exceeds the market value of the firm as a whole. Under such circumstances the firm divests its individual assets to make a better gain than liquidating the firm as a whole.
• The practice of divestment is also used to get rid of an under-performing or a sick sector of a particular firm or a volatile sector from the market perspective to stabilize the concerned firm.
• The market regulatory authorities may compel a firm to divest in an effort to increase competition
Government initiatives of PSU stake buybacks to bridge the wide fiscal gap
Serious considerations are being given by the Finance Ministry to start buybacks of the PSU stakes which will augment the divestment program of Rs 40,000 crore of this fiscal year. This has been reaffirmed by a concerned Government official. However, as always, the buyback and selloff scheme is a risky proposal owing to an unknown factor called OFS (Offer For Sale). Adding fuel to the fire is a highly unpredictable stock market. One of the major practices of the Government is redeeming of shares of the state-run companies with ample cash balance (after the fundamental disbursements have been accounted for) as a dependable means of meeting the divestment targets. The auction of shares listed for divestment of the state managed companies is not a viable option as the said shares are witnessing a very low trading. As per the statement of a government official wishing anonymity, “There will be a lot of opposition, but we will ask the disinvestment department to initiate discussions with key administrative ministries for buybacks. Once the companies announce their annual results, we will take a stock of the situation and proceed accordingly”. Currently, the Government is engaged in furnishing a list of the companies that can be ‘milked’ to meet the divestment targets.
Normally the procedure of redeeming of stakes of a particular PSU is applicable to all kinds of shareholder with the exception of the entities promoting the said company. The promoters in case of Coal India is the Government and the Government had no qualms about distorting the mandate of non saleability of the promoter’s stake and utilizing the company’s reserve cash to buy back the promoter’s (in this case, the Government) stakes, so that the cash inflow is unidirectional, pointed to the Government’s pockets. The number of PSUs with the right profile to be utilized by the Government in its divestment program is actually very limited. The primary targets of the Government are Coal India, NMDC, NHPC and NTPC (as per the reports of Aakansha Sinha, CNBC-TV18) and accordingly discussions are being held for redeeming of shares. Coal India is the most prospective company for the divestment scheme with a cache of over Rs 62,000 crore in the reserve and with a consistent addition of Rs 15 ,000 crore in cash per annum. Based on the apparent affirmative of Coal India, the Government has already picked seven merchant banks to complete the transactions though there is no clear indication whether the buy back and the divestment procedures will occur simultaneously though the desperate situation of the Government has whetted its appetite for the cash flow from both.
But selling Coal India to domestic as well as foreign investors will prove to be a difficult proposition. The Children Investment Fund, an FII and one of the non promoting holders of Coal India, has already dragged the company and its directors to court. The allegation brought against the directors is a serious one of not performing to benefit the company’s interest. Besides the bankers will also create a complication as the Government, being the promoter of Coal India, is trying to elbow its position to the front in a rush to encash its stakes in the company. It is to be mentioned here that the planned 10% stake sellout of Coal India would have earned the Government the revenue of Rs 25,000 crore. However, under the current market situation the stake sale cannot be expected to be more than 5%. The Government’s program of divestment of the Indian Oil Corporation is no longer a feasible option. The free fall of the rupee against dollar has brought tremendous pressure on the Oil Marketing Companies (OMCs). The skewed rupee dollar balance has also thrown a spanner in the works of Finance Minister P Chidambaram whose plan of reversing the financial decrepitude of the country by raising more than US$ 600 billion involving the partial privatization of the state-run firms is on the brink of falling through. The volatility of the market has added to his woes.
While the approvals of the stake sale of NMDC and NTPC is eagerly awaited, the decision of 11% stake sale of NHPC, which could have accrued the revenue of US$ 300 billion, has been delayed for an indefinite period after the Power Ministry expressed its apprehension that the current market will definitely undervalue such a transaction. Besides, the current account deficit of the country is literally scaring away the investors. Ravi Mathur, one of the top officials for the divestment department of the Finance Ministry, went to Singapore and Malaysia on a head hunting mission for potential investors interested in the stake sale proposal. Another Government official with direct connections to the stake-sale program has commented wishing anonymity, “We need a short window of two months to raise the fund. No one can say with certainty for how long the market will remain volatile. If it is stabilized by the end of next month, the Government could sell stakes in companies in October and November”.
The divestment policy of the Government has always been a risky one. LIC, the largest insurance company of the country had neutralized OFS issues for the Government on more than one occasion, when the Government failed to meet its divestment target of Rs 24,000 crore in the last fiscal year. The volatility of the market and the slump of the rupee against dollar are making the divestment options less and less feasible. The only other option left for the Government, is buybacks. But then again no investor would touch any sale out program with a bargepole considering the gaping fiscal deficit of the country. Chidambaram and his Ministry, however, stay positive and are waiting it out for the market to turn. Then it will be possible for the Government to explore the various options to revive our asthmatic economy.