The government in its efforts to bridge the widening fiscal deficit has given its nod to the Central Public Sector Enterprises (CPSEs) to go for buyback of shares. The decision opens up another route for the government to disinvest stake even if the market sentiment is poor.
The decision could put pressure on cash rich PSUs like Coal India and NMDC which do not have big investments lined up in the near future, to buy back their shares. The government could nudge them to either buy back shares or participate in government auction, given their surplus cash position. However Minister of heavy industries, Praful Patel has clarified that the decision rests with the companies.
Buy back of equities will make the companies part with its reserves and surpluses. Under the existing regulations, a company will have to make provisions to buy back not just for one particular stakeholder but for all. Secondly it will have to extinguish all the shares bought back within a time limit.
As per the government, opting for buyback and auction routes does not mean that initial public offerings and follow-on public offers will not be used as a route for disinvestment. In fact the process for stake sale in a few other companies, including Oil India, is likely to start soon.
The government had so far been selling stakes in state-run companies through public offers in keeping with its stated objective of benefiting the retail investors, but volatile and uncertain market had made follow-on offers difficult. The government had set a disinvestment target of Rs 40,000 for this fiscal. However it has garnered Rs 1,145 crore from stake sale in Power Finance Corporation and its stake sale in ONGC through the auction route yesterday has fetched it Rs 12,666 crore after Life Insurance Corporation (LIC) stepped in to buy a majority of its shares.
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