Rs. 695 Billion Riddle

How does the government propose to achieve the divestment target?

With four months of the fiscal year gone, it is probably time to reflect on the overall divestment targets of the government. The Union Budget had set a disinvestment target of Rs.695 billion for the fiscal year. Of this, Rs.410 billion was to come through minority stake sale and the balance Rs.285 billion from strategic sale. At the end of 4 months, the progress has been extremely limited with just the OFS of REC and PFC completed. A few thoughts on the road ahead for the disinvestment program!

The Rs.285 billion question

Raising money through strategic sale is never going to be easy. Raising Rs.285 billion will be a virtual nightmare. A strategic sale of loss-making units will first require detailed due diligence and then a classification of assets based on market worth. If the government wants to attract investors, it must put up names like Air India and MTNL, apart from lesser known companies.

Most companies have problems

If you look at the break-up of Rs.410 billion proposed to be raised through minority sale, the dominant companies have valuation problems. ONGC, IOCL, NTPC and NMDC will account for 75% of the target. Hence their success is critical if the disinvestment program has to go through. ONGC has seen serious erosion in market value due to cheap crude oil prices. That does not look to change in the foreseeable future. NTPC has problems in terms of coal supply and margin issues. NMDC has also seen a sharp fall in price due to the slowdown in China and the meltdown in commodities. IOCL is probably the only company that can generate some serious value for the government. Disinvestment targets were set assuming much richer pricing. That assumption is likely to fall flat in the current scenario.

Where will the money come from?

A major assumption for the disinvestment program will be the appetite of FIIs. That will be more a function of Fed rates and the valuation of other emerging markets. The government may use the EPFO money for the disinvestment program. While the government has asked for Rs.6,000 crore, the EPFO Board of Trustees has only agreed for Rs.1,000 crore. That is a pittance. There is also the PSE-ETF scheme; but its size and ability to absorb volumes is doubtful.

Of course, there are other ways of getting the disinvestment program through like placing with LIC or designing a cross-holding structure. But that would be more academic in nature. The target of Rs.695 billion surely looks ambitious with just 8 months to go. Like last year, they may count on the dividends of cheap crude prices to make up for the disinvestment shortfall. ©

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