PSU share buybacks on hold? Good, we say!

The government’s divestment plan to earn Rs 40,000 crore to manage its widening fiscal deficit has gone for a toss again. Or so it seems. Going by a Financial Express report, the government has faced sharp dissent from the power ministry on the issue.

The power ministry has cash-rich PSUs like TOC, NHPC under it. The logic is simple: if the cash these companies have is given away to the government, how will capital expenditure needs be met?

[caption id=“attachment_148393” align=“alignleft” width=“380” caption=“The government could not bring out free issues by companies like ONGC and Bhel as planned because of poor market sentiment. Reuters”]  [/caption]

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The government had already mentioned that the proposal for cash-rich companies to buy back government shares had been prepared but the companies and respective boards would get to decide if they would go for the buyback or not. But even before the matter could reach individual companies, ministries have started reacting.

The government could not bring out free issues by companies like ONGC and BHEL as planned because of poor market sentiment and now is in a hurry to save its fiscal deficit targets. The finance minister had estimated a fiscal deficit target of 4.6 percent which can well be around 5.5 percent or even higher.

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But buying back of government shares by PSUs may not be a good option either. Citi, Morgan Stanley, BoAML have all cut India’s GDP growth target estimates for fiscal year 2013 because of high interest rates, global turmoil and low investment in India. Investments will be further crippled if the government squeezes out extra cash from these PSUs.

The second worry should be safeguarding the interests of small investors. Low investment resulting into poorer visibility of income for these cash rich PSUs will harm minority shareholders deeply.