In an innovative mechanism devised to partly make up for the shortfall in the Rs.40,000-crore disinvestment target set for the current fiscal, the Union Cabinet on Thursday approved buy-back of the Centre's equity by cash-rich public sector undertakings (PSUs).

With the enabling provision for quick dilution of the Centre's stake in blue chip companies through buy-back by the cash-rich PSUs themselves getting the Cabinet's nod at its meeting chaired by Prime Minister Manmohan Singh, the way is now paved for the government to inch a tad closer to the till-now elusive disinvestment target.

To facilitate quick transaction, market regulator Securities and Exchange Board of India (SEBI) has already relaxed the norms for buyback of shares and dilution of equity as a result of which PSUs will be able to complete the buy-out deals within days as compared to the normal disinvestment process through public offers which can take months.

Alongside, the Cabinet Committee on Economic Affairs (CCEA) is understood to have permitted financial institutions to buy the government's equity stake in PSUs.

Till date, the government has managed to garner a paltry Rs.1,145 crore through sell-off of PFC shares. The sale of ONGC shares on Thursday through the auction route was expected to mop up a sizable amount of about Rs.12,000-13,000 crore. However, with the floor price of an ONGC share pegged at Rs.290, very close to the price on the bourses, being higher than FII expectations, the response has been lukewarm and the mop-up at the end of the day's trading is believed to be in the region of Rs.8,500 crore.

Clearly, in the current market trend of high volatility and profit-taking, the auction route introduced by SEBI as a new mechanism called IPP (institutional placement programme) is unlikely to yield the desired results.

In its bid to garner the required funds through equity buy-back, the Department of Disinvestment had identified nearly two dozen cash-rich PSUs which account for a total cash reserve totalling nearly Rs.2-lakh crore. Some of these blue chip companies are: SAIL, NMDC, NTPC, Coal India, Oil India, MMTC, Neyveli Lignite Corporation, NHPC, BHEL and GAIL (India).

However, as to which are the PSUs that would finally opt for share buy-back is not clear as yet. This is evident from Finance Minister Pranab Mukherjee's reply when he said: “I can't say anything about the Cabinet decision which has been taken. There is due procedure and it will be announced in due course.”

The uncertainly is all the more owing to the fact that in January this year, the CCEA had to defer its decision on allowing buy-back of shares by PSUs as a number of key ministries such as petroleum and coal had viewed that utilisation of cash balances of PSUs would affect their expansion programmes.

In all probability, Coal India, which has a cash reserve of about Rs.45,000 crore, is likely to be the first in line for the buy-back route. There are likely to be many more, as is clear from the movement of share prices on the bourses. Despite a falling market, there were a number of PSUs which gained up to 5 per cent.

Among these were: MMTC, Coal India, NMDC, SCI, MTNL, HMT, STC, Hindustan Copper, Engineers India, and NHPC.

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