Coal India to buy back 5% govt stake next year

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Coal India may spearhead the disinvestment programme in the next financial year by buying back government’s 5 per cent shares in the company. This would net close to Rs 10,000 crore to the exchequer. Sources in the government told Financial Chronicle that the buyback plan, approved by the finance ministry, has already secured the approval of the Coal India (CIL) board and would be implemented at a suitable time early next fiscal. Financial Chronicle first reported the proposed share buyback by CIL in January.

The finance ministry has already sounded a few public sector enterprises with healthy cash balances to be ready either for a possible buyback or for declaring special dividend in the event of market remaining choppy for a public offer. It has asked Nalco and 3-4 other cash-rich PSUs to be ready for buyback at short intervals. The companies could be NTPC, NMDC and BHEL.

“The market is still fluctuating wildly and a buyback is considered a safe option at this juncture. In any case, the public offer of remaining 5 per cent government equity in CIL could be considered at a later stage,” said a government official privy to the development.

CIL is sitting on cash pile of over Rs 50,000 crore, while other companies in the list also have sufficient balance in their book to undertake buyback. A 5 per cent share buyback at current market price of CIL shares of Rs 314.80 a piece would net close to Rs 10,000 crore to the government. The government holding in the company stands at 79.65 per cent.

The government is looking at buyback scheme as it has set in budget a high disinvestment target of Rs 56,500 crore for FY17, of which Rs 20,500 is expected from strategic sale route.

The government had earlier proposed a market offer of 10 per cent of its shares in CIL, the largest coal producer in the world, during FY16, but choppy market conditions prevented it from going ahead with the plan.

In FY16, the disinvestment target was Rs 69,500 crore, but so far only 18,371 crore has been mobilised from sale of equity in six PSEs. In revised estimates, the government has kept disinvestment receipt at Rs 25, 312 crore.

In buyback, companies will use their cash reserves to purchase its shares owned by the government. They then extinguish these shares and bring down their paid-up capital. The entire transaction would result in public money sitting in PSUs moving to government’s books.

In 2013 too a proposal of buyback of its shares by CIL was debated but the process could not be completed as a key foreign investor Children’s Investment Fund Management of UK raised objections. Since then the fund has exited Coal India.

The main reason for slowing down of disinvestment programme this fiscal has been the lack of demand from investors in volatile markets that have seen crisis in Greece and China and uncertainty over increase in interest rates by US Federal Reserve.

State-owned financial institutions, particularly Life Insurance Corporation, bailed out government’s disinvestments programmes this year. In the 10% stake sale in Indian Oil in August last year, LIC bought 90 per cent of the shares that were on offer. After that fiasco, no stake sales could be carried out for several months. Only in January, the government came up with a small issue from EIL where it sold 10 per cent of its equity. This was followed by sale of 5 per cent shares in NTPC.

Through buybacks government will get the access to vast amount of cash lying with PSUs, which do not need them for immediate investments.

In January, finance ministry in an order asked the PSUs to increase minimum dividend payout to 30 per cent of the net profit of equity capital, whichever is higher. Earlier the minimum dividend a profit-making PSU had to pay was 20 per cent.

Apart from higher dividend, the order also asked PSUs with high cash and free reserves to consider special dividend and issuing of bonus shares and explore raising debt to finance their expansion plans.

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