Strategy: One more option to raise money; we offer some ideas too ::Kotak Securities

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Strategy
India
One more option to raise money; we offer some ideas too. As per press articles,
the Indian Government is considering pledging shares in Specified Undertaking of the
UTI (SUUTI) in order to raise funds and buy shares of certain Government-owned
companies. If implemented, this may obviate the need for market-unfriendly options
such as cross-holding among cash-rich Government-owned companies. We offer other
options that may be more acceptable to the market.
Government to pledge shares in SUUTI to raise funds to buy shares of Government-owned firms
We note that there is no official confirmation on the aforementioned plan. Exhibit 1 gives details
of the major shareholdings of SUUTI and their current market value. The Government can raise
`160 bn from pledging the shares in SUUTI and use the funds to buy shares of Governmentowned
companies in future divestments to meet its divestment target for FY2012E (`400 bn).
We are not sure how this process is different from (1) pledging its shares in Government-owned
companies to raise funds from the market or (2) divesting shares directly in the market;
presumably, the new Government Company may be a more ‘willing’ buyer.
This may obviate the need for cross-holdings hopefully
We do not see the aforementioned proposal as the most optimum solution for raising funds from
divestment of Government-owned companies. However, it is better than the proposal of crossholdings
among cash-rich Government-owned companies being considered by the Government in
lieu of proper divestment. This may alleviate concerns about unnecessary cross-holding among
Government-owned companies.
Dividends or buy-backs make more sense; better still, adopt ‘horses for courses’ strategy
In our view, special dividends or buy-backs from cash-rich PSUs would be preferred by the market.
In fact, the Government can follow different strategies based on the specifics of companies. For
example, it would make eminent sense to ask Coal India for a special dividend. The Government’s
90% ownership and collection of dividend tax on the entire dividends would result in very little
leakage to minority shareholders. In the case of ONGC, a buy-back may be ‘better’ than
dividends—some minority shareholders may not want to tender at current levels, which would
result in higher acceptance for the Government of India. Also, we would suggest (1) special
dividends in lieu of the extant subsidy-sharing system (see Exhibit 2) or (2) a transparent subsidysystem
or pricing formula for upstream companies as the best way of realizing the ‘right’ value
from a divestment; their valuations would be significantly higher under our plan.
The best option for the Government is to mend its fiscal position
The best option for the Government may be to focus on fiscal consolidation through key reforms
on taxation (GST, DTC) and subsidies (targeted subsidies on fertilizers, food and fuels). This may be
wishful thinking at the current juncture given rising fiscal profligacy and declining tax-to-GDP ratio
(see Exhibits 3 and 4). However, the current path appears unsustainable; ad hoc divestments in
whatever form will only buy time.