Disinvestment : LIC to play saviour again?

Market volatility not withstanding, the government appears confident of meeting the disinvestment target of Rs 40,000 crore set in the budget 2011-12. With institutions like Life Insurance Corporation (LIC), the state-owned insurance behemoth, announcing an intention to deploy a sizeable chunk of the insurance money into equities, one could put two and two together.

As strange as it may sound and it’s no rocket science, it may be possible for the government to meet its target this year. In the Economic Times, LIC said that it plans to “invest around Rs 60,000 crore in equities, depending on market conditions”. It is possible that once again “LIC” may play the saviour and help the government achieve its target.

In 2009-10, LIC had been one of the largest investors accounting for more than half the money raised through disinvestment. It appears that the government could indulge in the small ‘accounting’ exercise to show that the budget achieved its target.

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[caption id=“attachment_87241” align=“alignleft” width=“380” caption=“LIC plans to invest Rs 60,000 crore into equities. Reuters”]  [/caption]

The BSE Sensex has declined 12.8 percent while the BSE- Public sector Undertaking (PSU) index fell by a sharper 24 percent over the last one year. Lack of investor interest was clearly visible in the sharp fall in the PSU index as they are not very bullish on these much-doubted ‘Ratnas’. Even over the last one month, when the Sensex rose by 1.2 percent, the PSU index fell by 2.4 percent.

This is obviously a bad sign for the government as it may not have too many takers for its disinvestment programmes, said a Mumbai-based equity analyst. The money raised is generally through a stake sale in its various possible PSUs. For 2011-12, it has a disinvestment target of Rs 40,000 crore and with almost half the year gone by, it seems unlikely that it would meet its target. So far it has managed to raise only Rs 1,100 crore by diluting its stake in Power Finance Corporation.

Considering the poor market condition, the exercise makes sense because the government can raise money without completely giving up control. It would also be foolish to exit public sector companies that are performing better than even some of the largest private sector companies.

Every year the government has a disinvestment target. The money raised is generally through a stake sale in various public sector undertakings. Last year, it raised around Rs 22,763 crore, almost 44 percent short of its target for 2010-11. This was mostly on account of it offloading its stake in Satluj Jal Vidyut Nigam Limited, or SJVN, Engineers India, Coal India, Power grid and Shipping Corporation Of India. For 2011-12, the government was planning to raise almost Rs 15,000 crore by diluting stake in companies like SAIL, ONGC, Hindustan Copper and NBCC. However, most of these issues have been delayed or scrapped owing to various hurdles.

ONGC’s follow-on-public offer (FPO) was expected to hit the markets on 20 September. But this was scrapped once again. R Gopalan, Economics Affairs Secretary, said “We can’t go ahead with disinvestment in volatile markets . We don’t want to sell PSU stocks recklessly”. The government was expected to dilute a five percent stake to raise approximately Rs 12,000 crore. While its stake sale of five percent in SAIL has been approved and the FPO deferred, approval for a 10 percent disinvestment in Hindustan Copper and National Building and Construction Ltd have been granted.

The government has also approved the disinvestment of up to 5 percent in BHEL, and is now awaiting approval for Nalco. For now, it seems like a roller coaster ride for the government as the market outlook continues to remain uncertain.