The Indian government wants to disinvest from its companies to achieve multiple aims. One aim is to raise cash for the government. The other aim is to bring in public participation so as to bring a wider ownership and thus answerability to the company.
Like many other endeavors, the disinvestment too has been hurt by the pandemic COVID-19. For example, the sale of BPCL has already been postponed four times, while the privatization scheme of Air India is still to get a good investor response.
Even the proposed share sale in certain PSUs has not taken off resulting in disinvestment proceeds reaching just over Rs 5,695.63 crore so far against a target of Rs 2.01 lakh crore. The government has divested its shares in only two CPSEs - Hindustan Aeronautics Limited (HAL) and Bharat Dynamics Ltd (BDL).
Last year, Security Printing & Minting Corporation of India Ltd (SPMCIL), MOIL and Mazagon Dock Shipbuilders Ltd (MDL) bought back government shares.
To claim ownership of a company any entity has to have a majority stake, which means greater than 50% ownership. The government of India has greater than equal to 50% ownership of the state-run enterprises.
If these companies are made to buy back their shares and the government sells their share, then the disinvestment process will achieve one of the aims i.e. of raising cash.
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Now, only those companies will be asked to do buyback which are financially stronger and cash-rich. According to Department of Investment and Public Asset Management (DIPAM) guidelines, CPSEs with a net worth of at least Rs 2,000 crore and cash balance of more than Rs 1,000 crore shall exercise the option to buyback their shares.
Under these guidelines, a whole host of companies such as Power Finance Corporation, RITES Ltd, Power Grid Corp of India Ltd, Container Corp of India Ltd, IRCON International Ltd and Rail Vikas Nigam Ltd qualify. Apart from these, the bluechips NTPC, CIL, NMDC and oil sector PSUs also qualify to go in for buyback.
Under the rules of capital markets, if the ownership falls below 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 their shares as the process increases the percentage of ownership per share. For traders, the announcement of buybacks may provide an opportunity to buy when the announcement is made and sell either back to the company or in the open market when the price rises.
Buybacks are good for the companies as the transaction cost is low and it is not a time-consuming process compared to the alternatives. Buybacks also help improve financial parameters of the companies, which in turn improves investors' interest enabling companies to tap the equities market for funds when needed.