Throwing a spanner on the Finance Ministry’s option of starting this fiscal’s Rs 40,000-crore divestment programme with share buybacks, the Indian Oil Corporation (IOC) has refused to adhere to the method as part of government’s 10 per cent disinvestment plan saying that the company already has a huge debt, and no money to spare.

This has left the Department of Disinvestment (DoD) with no option but to prepare for a new Cabinet note in which it will propose 10 per cent government stake sale in the oil company through the offer for sale (OFS) route, senior officials have said.

The official said that DoD has cited huge borrowing as the reason for not resorting to buyback. At the end of April-December 2012, IOC’s borrowings stood at over Rs 94,000 crore The government plans to sell 10 per cent stake or over 19.16 crore shares in the the nation’s largest oil firm to rake in between Rs 6,000-7,000 crore to the exchequer. The proceeds from IOC disinvestment is likely to be the second largest after Coal India in the current fiscal.

With shares of state-run companies listed for divestment trading low, an auction of shares now is unlikely to fetch the government its targeted revenue, so the option of buyback was thought of.

A buyback, or repurchase, of shares in state-run companies that have large cash balances (after capital expenditure plans have been taken into account) is a tool the government may use to meet its divestment target. It is currently drawing up a list of companies where this option can be exercised. In 2012-13, the government had allowed PSUs to buyback shares using their surplus cash or buy minority stake in other PSUs with whom they have strategic business relationship. The government is of the view that buyback of shares will provide for sustained investor interest in PSUs, and also protect their market capitalisation. Besides, such disinvestment will not disturb the secondary market share price of state-run companies lined up for disinvestment.

The administrative ministries and the state-run companies have cold-shouldered the idea, as they are keen on retaining their cash surplus for capital expenditure plans.
Meanwhile, the Finance Ministry has asked all cash-rich PSUs like Coal India, ONGC and Oil India to consider buying government equity in other state-run firms if they do not have sufficient capex plans.