Government may ask SU-UTI to borrow to buy PSU shares

Hard pressed to meet the year's disinvestment target of Rs40,000 crore, a cash-strapped union government may again lean on one of the financial institutions it controls. It is considering pledging shares held by the Specified Undertaking of the Unit Trust of India (SU-UTI) to buy shares of public sector undertakings, where a public offer may not fetch much due to adverse market conditions and other factors.

In what appears a retrograde move to shore up government finances, SU-UTI may be asked to borrow against its holdings in blue chips such as Larsen & Toubro, Axis Bank and ITC Ltd. These funds can be used by the undertaking to purchase a piece of the government stake in some PSUs, according to unconfirmed reports.

SU-UTI holds 11.59 per cent stake or 896.7 million shares in tobacco major ITC, 50.5 million shares or 8.27 per cent stake in L&T and 97.2 million shares or 23.58 per cent stake in Axis Bank. The combined value of its shareholding at today's market price stands at about Rs35,000 crore. It can use these shares as collateral to borrow funds from banks.
While the government has targeted disinvestments to the tune of Rs40,000 crore in PSUs, it has so far raised only just over Rs1,100 crore from divesting stake in Power Finance Corporation.

The government had raised around Rs22,762 crore from disinvestment in 2010-11, against a target of Rs40,000 crore.

Buyback of equity by cash-rich PSUs is also being considered actively, as the government devises an alternative plan to beat a weak market and yet raise money for its expenses.

The finance ministry is also reported to be exploring options such as sale of residual stake in companies such as Hindustan Zinc and Bharat Aluminium Co, and buyback of equity by cash-rich PSUs. Some PSUs like Steel Authority of India Ltd and Hindustan Copper have decided against raising fresh equity in the light of current market conditions.
The government, however, has decided to go ahead with plans to divest shareholding in these companies, as it felt the needs of cash-surplus PSUs are different from a cash-strapped government.