The Indian government wants to disinvest from its companiesto achieve multiple aims. One aim is to raise cash for the government. Theother aim is to bring in public participation so as to bring a wider ownershipand thus answerability to the company.
Like many other endeavors, the disinvestment too has beenhurt by the pandemic COVID-19. For example, the sale of BPCL has already beenpostponed four times, while the privatization scheme of Air India is still toget a good investor response.
Even the proposed share sale in certain PSUs has not takenoff resulting in disinvestment proceeds reaching just over Rs 5,695.63 crore sofar against a target of Rs 2.01 lakh crore. The government has divested itsshares in only two CPSEs - Hindustan Aeronautics Limited (HAL) and BharatDynamics Ltd (BDL).
Last year, Security Printing & Minting Corporation ofIndia Ltd (SPMCIL), MOIL and Mazagon Dock Shipbuilders Ltd (MDL) bought backgovernment shares.
To claim ownership of a company any entity has to have amajority stake, which means greater than 50% ownership. The government of Indiahas greater than equal to 50% ownership of the state-run enterprises.
If these companies are made to buy back their shares and thegovernment sells their share, then the disinvestment process will achieve oneof the aims i.e. of raising cash.
Now, only those companies will be asked to do buyback whichare financially stronger and cash-rich. According to Department of Investmentand Public Asset Management (DIPAM) guidelines, CPSEs with a net worth of atleast Rs 2,000 crore and cash balance of more than Rs 1,000 crore shallexercise the option to buyback their shares.
Under these guidelines, a whole host of companies such asPower Finance Corporation, RITES Ltd, Power Grid Corp of India Ltd, ContainerCorp of India Ltd, IRCON International Ltd and Rail Vikas Nigam Ltd qualify.Apart from these, the bluechips NTPC, CIL, NMDC and oil sector PSUs alsoqualify to go in for buyback.
Under the rules of capital markets, if the ownership fallsbelow 50% then that entity is no longer a majority stakeholder.
About 10 companies are being finalized. These include NTPC,Coal India, and NMDC. About 5% to 10% may be asked to be bought back.
Buybacks are good for the shareholders who do not sell theirshares as the process increases the percentage of ownership per share. Fortraders, the announcement of buybacks may provide an opportunity to buy whenthe announcement is made and sell either back to the company or in the open marketwhen the price rises.
Buybacks are good for the companies as the transaction costis low and it is not a time-consuming process compared to the alternatives. Buybacksalso help improve financial parameters of the companies, which in turn improvesinvestors' interest enabling companies to tap the equities market for fundswhen needed.