Govt Reviews Options to Put Divestment on Track

DESPERATE TIMES CALL FOR DESPERATE MEASURES

The government wants to tweak securities transaction tax and is readying a new plan to get markets excited about disinvestment

    The finance ministry has ordered an overhaul of the government's disinvestment strategy for the year after the stake sale programme managed to raise just 2.75% of the annual target in the first six months, portending trouble for its budget calculations. Officials said options being considered include bringing first-time public offers of firms such as Hindustan Aeronautics, India's biggest defence aviation company, and state-owned construction firm NBCC to the front of the disinvestment queue and do bulk sales of equity of stateowned firms to domestic financial institutions. As an extreme step, cash-rich staterun firms could be leaned upon to buy the government's stakes in other public sector firms. 
"We have asked the disinvestment department to get back with a plan B," a senior finance ministry official told ET. 
The ministry is determined to stay within the targeted fiscal deficit figure of 4.6% of GDP this year despite the possibility of lower revenues due to slowing economic growth and a higher-than-budgeted subsidy burden. Most independent experts expect the fiscal deficit to exceed 5%. 
The government will need the . 40,000 crore it has budgeted from disinvestment if it has to meet its fiscal deficit targets. It had lined up a series of follow-on public offers (FPOs) in state-run firms. But choppy markets have derailed its plans, resulting in it raising just . 1,100 crore through the sale of 5% equity in Power Finance Corporation. 
Different Strokes 
Will the markets dance to the govt's new tune? Unlikely. The STT forms a minuscule part of an investor's trading expense and a cut may not cheer brokers worried over Greece, the global crisis and govt's policy paralysis 
So why is it pushing ahead? 
The UPA regime is facing a crisis of confidence and credibility. It is trying to improve sentiment and attract greater capital flows 
Bureaucratic, logistic hurdles 
Lukewarm investor response may not be the govt's only problem. The STT is a direct tax and cannot be changed without Parliament's nod 
Plan B for disinvestment The government is discussing three options: Push Hindustan Aeronautics and NBCC into the market; get cash-rich institutions to buy stakes; use cash-rich PSUs to buy stakes in each other 
Old wine in new bottle 
Many of these measures have been used in the past with little success. The markets want bold reforms. Hike in FDI limit in insurance, allowing foreign investments in multi-brand retail and easing rules that stifle corporate investment IPOs may Find Takers if Priced Well, Feels Govt 
Although the FPO was attractively priced, the stock has been hammered in the markets and officials fear this could dissuade retail investors from investing in other follow-on offers. 
Shares in Power Finance Corp have fallen to . 148.65 apiece, well below the offer price of. 193.5. 
The finance ministry earlier this month decided to pull the plug on a follow-on offer of shares of the country's top oil company ONGC after it feared a tepid investment response. But the thinking within the government is that initial public offers (IPOs) could still find takers in the current market if priced attractively. "IPOs have a better chance than FPOs since with FPOs there is a price hangover," said Yogesh Kapur, senior vicepresident at Enam Securities. 
Secondary market prices of shares of state-run firms have fallen after their FPOs are announced in anticipation that these shares will be offered at a discount to prevailing prices. 
Finance ministry officials said IPOs would fetch the government more money because the price discovery mechanism would not be influenced by the overhang of existing equity and also because the companies in which share sales were being considered were good, profitable companies. For instance, they are expecting good interest for HAL stock, not least because the company had a net profit of . 2,114 crore on a turnover of . 13,000 crore in 2010-11. One of HAL's defence sector peers, state-run Bharat Electronics, has a market value of . 12,000 crore. It posted a net profit of . 861 crore on a turnover of . 5,471 crore. Based on the value for BEL, officials expect a 25% stake sale in HAL to fetch the government a tidy sum. "IPOs priced aggressively on the lines of Coal India could generate a lot of interest," said a senior executive in the capital markets division of a leading securities firm, referring to the IPO by Coal India last October which was heavily oversubscribed. The other option that has been discussed is getting cash-rich state institutions such as the Life Insurance Corporation (LIC) to buy stakes from the government. This route has been used by the government to divest its holding before. 
The last, and according to officials the least preferred option, will be to ask cash-rich public sector companies to buy shares in other state-run companies from the government. Companies like Coal India and NTPC have cash running into thousands of crores.