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The key to meet disinvestment target
Wed, 3 Oct Pre-Open

After years of self induced inertia, the Government seems to be in a mood for reforms. But will that be enough to clear the economic mess that the country is in? While the Indian stock markets have cheered the recent reform measures, the concerns regarding rising fiscal deficit don't seem to be easing. Hence, the Government is now focusing on disinvestment to contain fiscal deficit and save the nation from a rating downgrade.

One should note here that last year, the Government could mop just Rs 140 bn of the 400 bn target in FY12. We slipped on this fiscal deficit target by a substantial margin of 65%. Keeping the volatile market conditions in mind, we think it would be over ambitious to assume that the target will be met this year. Unless the government does things differently. So, what can it do different this time to make the disinvestment of Rs 300 bn a success?

Well, the Kelkar committee has some suggestions for this. One way is launching an Exchange Traded Fund (ETF) made of public sector stocks. Such an ETF will offer benefits of diversification at low cost. However, it is hard to see how it will interest informed investors who may want a stake in a particular stock but not the entire basket of Government owned companies. Also, under subdued market conditions, the fate of an ETF is unlikely to be different from individual stock issuances. The other ways suggested by panel are to issue call options. While it can be popular since it gives investors the option (and not obligation) to buy shares, can hardly be a sure shot way to meet disinvestment target. Same is true for other options like investing or distributing surplus cash of PSUs as dividends.

Coming back to the target of Rs 300 bn this fiscal, about 70% of it is likely to be taken care of if the Government manages to sell its minority stakes in private companies like Hindustan Zinc and Bharat Aluminium Company (Balco) for which Vedanta group has already shown interest. But to meet the target, the Government needs to offer right price for such stakes to entice the investors who are quite sensitive to pricing. This was something too obvious from the damp response witnessed for Oil and Natural Gas Corporation's (ONGC) issue which was priced at a 2% premium. It will be crucial for the Government to get its act right for at least one issue. This would set a positive tone for the rest on list. And the perfect way to get it right is giving the investors an attractive discount.

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