Govt eyes unusual buyback to offset divestment failure

A lacklustre primary market is forcing the government to ask cash-rich public sector undertakings (PSU) to buy back their shares from it.

Talk is, Coal India, which has over Rs55,000 crore cash in reserves, is likely to be the first.

“There is a cabinet note sent to us on the issue, and we will react to it after talking to the Coal India management,” said Alok Perti, secretary, ministry of coal, on Monday.

But this cannot be a pure buyback as the rules go, but may end up being something like a ‘buyback placement — an unusual divestment’, said sources.

Jayant Thakur, a Mumbai-based chartered accountant and securities regulation expert, said current rules don’t allow such a process.

“Under current regulations it is not possible for a buyback to take place with a single entity. They would have to create a a special scheme which would need court approval,” he said.

There have been cases where the court has allowed for buybacks which are structured differently, he pointed out.

Fo example, Sterlite Industries received court approval for such a buyback in 2002 where it attempted to purchase 50% stake from shareholders and investors were deemed to have accepted the offer if they did not object.

The Securities and Exchange Board of India (Sebi) moved court for a stay on this and eventually the company withdrew the offer.

Rules will make any execution tricky, agrees Dipesh Dipu, director-consulting, mining, Deloitte Touche Tohmatsu India.

“So it may take a little longer. Under current rules, Coal India will have to announce a buyback for other shareholders as well. That would be very tricky,” he said.    

Such a move would also be against the grain of current regulations, said Pavan Kumar Vijay, managing director at Corporate Professionals, a financial consultancy firm in Mumbai.

“Sebi does not allow promoters to participate in a buyback offer. They would have to change the regulations or get them relaxed for this to happen,” he said.

According to the Bombay Stock Exchange website, currently, the government holds 90% in Coal India and foreign institutional investors (FIIs) 6.32%, while domestic institutions and others hold 1.57% and 2.11%, respectively.

The department of disinvestment has prepared a list of about more than 12 companies, including Coal India, Steel Authority of India Ltd, NMDC, Oil India, MMTC, NTPC and Oil and Natural Gas Corporation, which may be asked to buy back government’s stake.

The move is to help the government meet its Rs40,000 crore divestment target for the current fiscal. Of this, it has garnered just `1,145 crore — by selling 5% stake in Power Finance Corporation.

“The government cannot raise so much now. It cannot ask PSUs to announce a buyback in the next 4 months, but yes some of them would be able to do it, and it would help government raise a substantial amount,” said an analyst, with an international brokerage firm.

The decline in the rupee has not helped the government’s cause to raise funds from the primary markets.

FIIs, which were net buyers of equities by Rs136,000 crore in 2010 are affected negatively by the depreciating currency.

In April, the rupee was at Rs44.4 per dollar and now it has depreciated to Rs52 per dollar levels.

FIIs have been net sellers by Rs3,026.30 crore in 2011, according to Sebi data.
Meanwhile The Coal India management has indicated that its cash reserves would be higher at the end of the fiscal than it is at present, according to a Bloomberg report.

“The ministry has asked us about our cash position and we have told them that we only have Rs15,000 crore of cash to spare,” Coal India chairman Nirmal Chandra Jha told Bloomberg on Monday.

“We expect to have cash reserves of Rs60,000 crore by the end of this fiscal.”