Centre planning to raise at least Rs 10 bn via Coal India share buyback

The Centre is considering a share buyback proposal for Coal India whereby it plans to raise at least Rs 10 billion as part of its disinvestment target from various public sector enterprises for the current fiscal year.

Sources aware of this development said that although a share buyback proposal was initially mooted, it was put in the backburner after the company, as well as the government, felt it would be better to opt for a stake sale to investors in the open market. However, Coal India’s shares failed to breach Rs 300 mark prompting the coal ministry to fall back on this route.

It follows after Coal India in August wrote to Securities and Exchange Board of India (Sebi) seeking an extension of another year to go ahead with the stipulated mandatory regulation which directs the government’s holding in a public sector enterprise not to exceed 75 per cent. Currently, the government holds 78.55 per cent of this company.

Sources suggested that although the government had initially planned a 10 per cent stake sale, it is still not clear what percentage of shares the government may ask Coal India to buy back this time.

Company sources said that Coal India or any of its subsidiaries will not need approval from its shareholders in case the buyback is less than 10 per cent of the paid-up shares of the company. It has been suggested by a senior Coal India official that this buyback, which is under consideration, may not exceed this threshold limit.

Besides, the decision of the government may also have been influenced by the dividend payout from Coal India this year.

This year, this Maharatna company paid an interim dividend of Rs 102.42 billion at Rs 16.50 per share. Of the total dividend, the government received Rs 80.45 billion and the residual amount of Rs 21.97 billion was paid to the rest of the stakeholders.

Coal India, in its 2017-18 Annual General Meeting had sought shareholders’ approval for treating the interim dividend as the final one.

The dividend payout by Coal India has been on a declining trend with its cash reserves depleting to just a little over Rs 300 billion now. While in 2016, it paid Rs 27.40 per share as the dividend, it declined to Rs 19.90 apiece in 2017 in the last fiscal year, further dipped to 16.50 per share. 

A lower rate of dividend payout is most likely to affect the government’s total annual earnings from this company.

Sources in Coal India suggested that Mahanadi Coalfield, the company’s most important subsidiary, alone can pay for the share buyback plan. Mahanadi Coalfield’s cash reserves are estimated to be in excess of Rs 100 billion.

South Eastern Coalfield and Northern Coalfield are the other two financially strong subsidiaries which can also chip in if need be.

Under the share buyback process, first a subsidiary will pay its parent company – Coal India – to buyback its own shares from the parent, and then, the parent company will use this money to fund its own buyback.

In 2016, the government had raised Rs 26.38 billion from Coal India via a similar share buyback initiative when the value of each share under buyback was negotiated at Rs 335. However, in the last 30 days, the Coal India scrip has been hovering around Rs 280 apiece.