Buyback of Shares by PSUs - Disinvestment Target

What is the issue?

• The government seeks to meet its disinvestment target through buybacks of shares by public sector undertakings (PSUs).
• But there are concerns that this mode of divestment may not yield the desired results.

What is the disinvestment scenario?

• The government, in the Union Budget for 2018-19, fixed for itself a disinvestment target of Rs 800-billion.
• But the disinvestment target is likely to fall short of the Rs 800-billion Budget Estimates.
• Given the market conditions, the disinvestment proceeds could be at most Rs 650-700 billion, with a shortfall of Rs 100-150 billion.

What is the government decision?

• Government seeks to meet the disinvestment target in part through buybacks of shares by public sector undertakings.
• So PSUs would pay the government for the shares it holds, reducing the number of their shares in circulation.
• The effect on government shareholding will depend upon the final construction of the repurchase programme.
• But it seems nevertheless that a move is afoot for oil sector PSUs in particular to buy back shares worth Rs 100 billion.
• Reportedly, the full buyback programme may raise up to Rs 200 billion.
• This would facilitate filling the government’s budgeted requirement of Rs 800 billion from disinvestment receipts.

What are the concerns with share buyback?

• Efficiency - The rationale for disinvestment is to reduce the government’s control over PSUs.
• This is to eventually pass it to the private sector, with all the efficiency improvements that it would bring.
• Also, it would enforce market discipline on PSUs, which would have to behave like listed companies.
• However, these particular goals/purposes may not be served, even incrementally, by a share buyback.
• Stocks - Share buybacks could send stock prices higher disproportionately if market trusts that the companies are doing well.
• But this is not the case here, as certainly the government is merely ordering a share buyback because of its own financial constraints.
• Fiscal deficit - The purpose of controlling the deficit is to ensure that the government is not absorbing all the available investible funds.
• But PSU share buybacks is certainly the opposite, with transferring resources to the government (principal owner of the PSUs).
• Investments - Economic growth depends upon revitalising investment and PSUs' profits could be spent on such investment.
• But when it is expropriated by the government, a large part will go to fund government spending.
• Also, this is a time when oil PSUs could be focusing on investment to scale up production.
• But at a time when investment revival needs to be nurtured, the government is instead reducing the resources available.
• It is high time that the government instead focus on genuine, strategic disinvestment.

Source: Business Standard