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Should PSUs be buying stake in one another?
Fri, 3 Jan Pre-Open

Failing to stick to its target of bringing the fiscal deficit down to around 4.8% of GDP in FY14, the government is looking at all possible avenues to bridge the gap. The ambitious divestment program was touted to ease considerable pressure off the Centre but with market conditions proving to be volatile, stake sales so far have been a damp squib. The government has so far fetched Rs 13.2 bn as against the budgeted target of Rs 400 bn, with just three months left for the fiscal year to close. And it is in this mounting desperation that the government is now looking to milk the cash rich PSUs.

The government is planning to push state run-firms to buy stakes in each other. Looking at ways to shore up funds to meet the runaway fiscal deficit, cash-surplus public sector companies like National Mineral Development Corporation (NMDC) and Coal India will use a portion of their cash pile to pick up stakes in public sector companies. Through the cross holding route, the government will be able to receive the entire outflow from the PSU's. Unlike special dividends, where there will be some leakage as minority shareholders will also get their due.

According to Crisil, by March 31, 2014, the cash holding of the top 20 PSUs will have an estimated pre-dividend corpus of around Rs 1,600 bn, and the companies are comfortably placed to pay special dividends of Rs 270 bn over and above their normal dividend pay-outs, without impacting their capex plans.

However, pushing PSUs to buy shares of other PSU's is only a short term solution to a more chronic long term problem. More emphasis will have to be laid on streamlining subsidies and cutting down overall non-developmental expenditure, so that there is more headroom to spend on activities that have the potential to contribute to India's GDP growth. Otherwise, the problem of rising fiscal deficit will only keep popping up as a regular thorn on the government's side.

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