PSU Share Buybacks - A Step in the Right Direction?

Thu, 28 Apr Pre-Open

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The Finance Minister is looking to improve the financial management of the public sector units. In this regard, the newly renamed Department of Investment and Public Asset Management (DIPAM or formerly known as Department of Disinvestment) is working on evaluating the performance of PSUs.

These public sector units are now going to be monitored on various factors like operational efficiency, paid-up capital and reserves, as well as dividends and investments as a percentage of profit after tax.

Further, the Department of Public Enterprises is also monitoring the capacity expansion by the PSUs on a monthly basis.

The government is now closely looking at cash utilization by the public sector companies. The rationale behind this move is that investment in PSUs should earn more than the bank rate over the long run. If that is not the case, then the companies should undergo capital restructuring.

The Finance Minister also reiterated that the firms which do not have any expansion plans and have idle cash deposited must opt for capital restructuring through activities such as share buybacks.

The government has set a disinvestment target of Rs 565 billion. While reducing stakes in these cash rich PSUs is one option, they have also been asked to consider returning the capital via share buybacks.

Cash and idle reserves of PSUs is estimated at Rs 2.6 lakh crores. The past fiscal saw two public sector units i.e. Hindustan Aeronautics and Bharat Dynamics Ltd opting to buy back government shares. The cash balance for HAL and Bharat Dynamics was over Rs 200 billion as on March 2015. This has helped the government raise close to Rs 450 billion.
The government is also keeping a keen eye on the funding requirement for unlisted PSUs. There are many companies which have made consistent profits over the past three years. This scrutiny by the government is to ensure efficient utilization of cash and to bring in transparency and accountability.

At present, the government is looking at a 10% share buyback in National Aluminum Company (NALCO). Cash rich companies including Coal India and ONGC are also slated for a possible share buyback in this fiscal. In addition to the share buybacks, the government is looking to raise around Rs 360 billion via minority stake sales.

It will be interesting to see whether the government will be able to meet its disinvestment target this year around. As far as stake sales go, in an earlier edition of the 5 Minute WrapUp, we had discussed how the stocks of likely disinvestment targets  were down by 9% to 37%. A lot of them were in the resource sectors, and so the dull economic outlook as well as weak commodity prices only made matters worse. Not much has changed in the last 4-5 months. As long as stock prices of these companies depressed, stake sales will most likely be put on the back burner.

Probably, share buybacks could provide some relief in that sense and help ease the pressure on government finances.

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