Government to ask PSUs to launch share buyback programme

07 Nov 2011 Evaluate

The government is planning to ask cash-rich public sector undertakings (PSUs) to start share buyback programmes to return money to its shareholders as it grope for ways to raise funds.

Currently around two dozen PSUs has cash reserves of Rs 1,80,000 crore and department of disinvestment was planning to ask some of them to return a portion of these fund to their owner, especially the government, which as largest share in these firms.

This move is expected to help government to meet its current financial year’s disinvestment plan, which has been disrupted by weak market conditions along with fear of another recession in Europe and slowdown in the United States.

For the current financial year, government had set disinvestment target of Rs 40,000 crore. In first seven months of 2011-12, the government has raised only Rs 1,144 crore from sale of shares in government-owned companies because of adverse market conditions.

A share buyback offer allows a firm to purchase its own shares and extinguish thus reducing the equity base. Normally, firms with large capita reserve and no plans for big investment go for buybacks. Buybacks are done when, companies feel their shares are undervalued or when market conditions are subdued. Up to now, no government-owned PSUs have opted for such a programme.

Additionally, the government is exploring the possibility of asking PSUs to buy shares in state-run firms from whom they procure raw materials. This move of government will allow government to raise funds by selling shares and give raw material security to government run companies.

This strategy may result, as firms like NTPC and SAIL buying minority stakes in Coal India and NMDC and taking board positions to ensure uninterrupted supply of raw material. In 1999, the government has used likewise thus not a similar strategy to meet its disinvestment target, it had raised around Rs 5,000 crore via equity swap in oil companies.

Mohd Haleem Khan, secretary, Department of Disinvestment said “Cash-rich companies should use surplus cash to acquire assets that ensure raw material security to enhance the return on equity or return them to shareholders as is prevalent in the private sector, by adding further he said consultations were on and a final decision would be taken soon.

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