Government wants to tweak strategy to meet Rs 40,000 crore divestment target

NEW DELHI: The finance ministry is looking to tweak its overall disinvestment strategy to include innovative financial instruments, as it is finding it difficult to push through regular stake sale on stock exchanges. The Rs 40,000 crore budgeted from disinvestment are crucial if the government is not to breach the fiscal deficit target of 4.8% of GDP, as tax revenues are sure to fall below target. So far the government has only managed Rs 1,323 crore from disinvestment.

With barely four months left in the fiscal, the disinvestment department has begun consultations with stakeholders on the possibility of instruments such as ‘exchangeable bonds’ to raise funds. “Exchangeable bonds are being explored as an option,” said a finance ministry official privy to discussions on the matter.

Finance minister P Chidambaram had in his budget for 2007-08 allowed these exchangable bonds that allow the issuer to unlock a part of its holdings in group companies without immediate actual dilution. Essentially, the government can issue bonds that can be exchanged for shares of one of the state-run companies at a later date. The government could issue the bonds to, say, cash-rich Coal India, and in return give it shares of, say, Steel Authority of India. These would be exchange unloading its stake.

This will create a cross holding among public sector companies, which has been used earlier as well by the government to divest stakes. Tata group had shown interest in the much-hyped instrument then.

The government could also lean on cash-rich companies to buy back shares, and the proposed exchange-traded fund ( ETF) that will allow investors to buy units backed by underlying equity shares of public sector companies is expected to be launched soon.

The disinvestment department hopes the ETF will encourage long-term foreign investors to participate in the divestment programme as that would also shield the country against sudden outflows and also finance its current account deficit.

The ministry is talking to long-term investors such as sovereign wealth funds, pension funds and other new class of long-term investors that have shown interest in overseas road shows.

The government has in the pipeline offers of Power Grid Corporation, Indian Oil Corporation, Coal India, Hindustan Aeronautics and Engineers India. The finance minister had made it clear that he will not allow the breach of the ‘red line’ of 4.8% of GDP for fiscal deficit. Any shortfall in divestment proceeds could spell trouble for the government’s fiscal deficit target.