Analysts say pledging of shares would unlock only part of the value.
The government’s plan to float a new vehicle to pledge shares owned by the Specified Undertaking of the Unit Trust of India (SUUTI) and raise money may not be enough, say market participants and analysts. It would meet less than half of its disinvestment target. That too, only if it complies with the capital market exposure limits put in place by the Reserve Bank of India.
According to a Bloomberg report, the finance ministry is considering a proposal that involves the transfer of assets of SUUTI to a fund manager. Thereafter, the new entity would pledge SUUTI’s assets and utilise the proceeds to buy government equity in state-run companies.
The RBI master circular says, “a uniform margin of 50 per cent shall be applied on all advances/financing of IPOs/issue of guarantees” for capital market transactions. Banks may also levy a higher margin, given the volatile market conditions, since heavy falls may trigger margin calls.
Jagannadham Thunuguntla of SMC Capital says: “The maximum the government may raise would be up to Rs 15,000 crore, if it is a pledge. There will be a margin of 50-60 per cent in case of a pledge.” Last month, Mumbai-based brokerage ICICI Securities had suggested monetising the portfolio of SUUTI as one way to meet the Rs 40,000-crore disinvestment target for 2011-12.
A senior investment banker closely associated with the disinvestment programme said: “In addition to the margin, the new fund manager should also see the cost at which he is getting these funds. In a high-interest-rate environment, this model may not be viable.”
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In view of RBI’s concerns, bank lending against shares has been minimal. The market has been dominated by broker-owned non-banking finance companies. Market estimates put interest rates on loans on pledged shares at anywhere between 15 per cent and 25 per cent. The new fund manager will be able to cover these costs only if there is sufficient appreciation in its portfolio. On the other hand, if the market tanks, it may get caught in the double whammy of steep interest rates and margin calls, say experts.
According to data compiled by BS Research Bureau, SUUTI held more than one per cent stake in 19 firms as on September 30.
At Thursday’s close, this holding was worth Rs 31,924 crore. Bulk of this value has come from the undertaking’s holding in three blue chips: ITC Ltd (11.54 per cent), Larsen & Toubro (8.27 per cent) and Axis Bank (23.58 per cent). In addition to these, SUUTI had fixed assets of Land and Office premises. On a written-down book-value basis, these assets were worth Rs 80 crore, according to its 2010 annual report. SUUTI is yet to publish its accounts for 2010-11. A SUUTI official declined to comment.
According to RBI master circular on the subject, capital market exposure of banks cannot exceed 40 per cent of their net worth as on March 31 of the previous financial year.
Among public sector banks, the net worth of State Bank of India was Rs 64,986 crore on March 31, 2011. At 40 per cent, the capital market exposure limit worked out to Rs 25,994 crore. All other state-run banks had limits of Rs 9,000 crore or less.
“Most banks may not have enough headroom in their capital market limits to fund the kind of amount the government is looking at. They may have to seek relaxation from RBI,” the investment banker said. He added that the government might look at some institutional funds that would be ready to lend.
RBI rules specifically provide for relaxation of rules for “banks’ financing acquisition of PSU shares under the Government of India’s disinvestment programmes”.
Such requests for relaxation of the ceiling would be considered by RBI on a case-by-case basis, “subject to adequate safeguards regarding margin, the bank’s overall exposure to capital market, internal control and risk management systems, etc”, the central bank said. The relaxation has to be considered in such a manner that the bank’s exposure to capital market in all forms, net of its advances for financing of acquisition of PSU shares, are within the regulatory ceiling of 40 per cent.
Prithvi Haldea, chairman and managing director of Prime Database, said the government should ideally sell off these shares and share the proceeds with the original UTI US 64 investors who were paid with Rs 10 bonds. “The government has no business holding on to these shares. These shares are not of national importance that the government cannot sell them.”
According to Haldea, the shares should be sold in a transparent auction. “These are widely held shares. These will fetch good value and the government would be able to meet its targets. But, the pledge route is being taken, probably, to protect the management of these companies.”