Plan B is to mug cash-rich PSUs if disinvestment fails

Thanks to the imminent failure of its Rs 40,000 crore disinvestment target this year, the UPA government is eyeing any cash-rich public sector undertakings (PSUs) rapaciously.

This time, the mugging is likely to happen with the blessings of the Prime Minister’s Office.

According to The Indian Express, the PMO has “directed” 10 ministries and departments to look at 24 cash-rich PSUs for surpluses that are unlikely to be needed for investment in the next 12 months. If the government thinks the money can be swiped to reduce the fiscal deficit, it will.

Companies with over Rs 1,000 crore cash-piles are being targeted, and the Express quotes the PMO’s letter to ministries as saying that “it is imperative that these surpluses, possibly leveraged suitably, be utilised productively”.[caption id=“attachment_119842” align=“alignleft” width=“380” caption=“Is PSU disinvestment on the right path?”]  [/caption]

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If what the newspaper has reported is true, the PMO’s idea is that the cash-rich PSUs should buy back, say, 5-10 percent of their own equity and give the money to the government.

A buyback of equity is permitted by companies under Sebi rules, but the moot point is whether what the government is contemplating is bonafide.

For starters, the PMO’s assumption that if you have surplus cash, it is someone unproductively used is questionable. Cash earns returns, and sometimes it is good to have cash in the bank as it means you can take a call to invest your own money when a good investment opportunity comes by.

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Moreover, even assuming the money is required, say, only two years down the line, it is worth having it in the bank as who knows how the market will be in 2013-14?

Secondly, cash held by an ONGC or a Steel Authority (SAIL) is infinitely more likely to be productively used by the companies themselves than if it were handed over to Manmohan Singh or Pranab Mukherjee, who have been busy wasting it in pork-barrel schemes and unwarranted subsidies. Cash with the government can safely be presumed to be wasted in political scheming.

Thirdly, there is also the little question of corporate governance involved. The cash belongs not only to the government, which may be a majority stakeholder, but other shareholders, too. If the government orders ONGC and Sail to buy back their equity, there is no way the companies can do so only from government. The offer will have to be made to all investors - which means Sebi will enter the picture.

One hopes, for the sake of the regulator’s credibility, that Sebi will not allow any exception to the rule that buybacks should not favour the majority shareholders alone.

The government has been scrounging around to raise money in every way possible - from borrowings to public sector share auctions and buybacks. Last month, it raised its borrowing target by Rs 53,000 crore.

Now, it is targeting public sector wallets. A few weeks ago, Economic Affairs Secretary R Gopalan told newspersons that buybacks were an option, if normal disinvestment was ruled out due to market conditions. “There can be equity shrinkage. Many, many possibilities are still there. Our aim is to achieve Rs 40,000 crore (disinvestment target). You can buy back equities, you can go for public offers. We are not going to revise our target as on date,” he was quoted by The Economic Times as saying.

In the last two years, the government has been unsuccessful in raising the money budgeted from disinvestment due to wayward market conditions. Last year, it raised Rs 22,762 crore against a target of Rs 40,000 crore, and this year it has managed a measly Rs 1,145 crore against a similarly large target.

Ministry officials are mulling over all kinds of auctions - French, Dutch - as long as it raises money for a cash-strapped government.

Mugging cash-rich PSUs and their investors through compulsory buyback is the latest indication of the growing desperation in the government about meeting the widening gap between revenues and expenses.