)
Desperate to meet its divestment target and reduce the fiscal deficit, the finance ministry is discussing plans to introduce a ‘buyback of shares’ in Coal India, NMDC and NHPC.
Ideally,buyback under normal circumstances will be applicable to all class of shareholders except promoters of the company. But in this case, government has bent the rule and is making companies use their cash reserves to buyback promoter's (government) shares.
In simple language, money will be transferred from the company to the promoter (government).
Given the poor response to the government’s divestment issues in the past, where public sector LIC had to bail it out in most of the cases, it had few choices but to think of this mechanism to reduce its stake and collect money. Had it chosen the normal route of divestment, chances are that it would have faced embarrassment, as it did in the ONGC issue.
Incidentally, the buyback comes within days of announcement of a stake sale proposal of Coal India and the government selecting seven merchant banks to carry out the sale. It is not yet clear if both buyback and divestment will be carried simultaneously. Government surely has the appetite for both.
There are very few public sector companies within its ambit that are cash rich and can be ‘milked’. Coal India is the fattest cow in the government’s stable with cash reserves of over Rs 62,000 crore with an addition of over Rs 15,000 crore in cash every year.
However, selling Coal India to investors, especially foreign investors, will be easier said than done. The largest non-promoter holder in Coal India, The Children Investment Fund, an FII has taken the company and its directors to the court for not working in the best interests of the company.
Bankers will have a tough stand in selling the issue when the promoter clearly wants to cash out before other investors. Making the company pay a price which the market would not is unlikely to go down well with investors.
Had government used the same pricing formula as it did for gas, Coal India would have not only been one of the most valuable company in the country but also one of the most sought after globally. It could have then diluted its stake easily without taking a back door exit and bending the rule to suit itself.
Further, the cash reserve of the company could have been better utilized for growth by acquiring assets globally and securing the company and country’s energy need.
Shareholders would have taken the private sector promoter to the cleaners had the cash reserve of the company been used to fill up the promoters pocket.
Once again, this government has shown that there is one set of rules by which the country is governed and another by which it can be judged.
