The Great PSU Squeeze

The state of the Indian economy’s financial health is no secret to anyone. India is reeling under a high fiscal deficit burden, and the threat of downgrades by rating agencies across the world to ‘junk’ status has been dangling over the country.

In its budget estimates, the government had predicted a fiscal deficit of 4.8 per cent of the GDP for FY14. But as the rupee nosedived and expenditure like food and oil subsidies put enormous pressure on our finances, the deficit touched 76 per cent of the deficit target in the first half of the year itself.

Needless to say, the government is under fire. While the Finance Minister P Chidambaram is toiling hard to cut the government’s expenditure and boost revenues through various sources, the policymakers are looking at the huge cash reserves of India’s Public Sector Undertakings (PSUs) as the next source to dip into.

With scant concern for the wellbeing of what were meant to be ‘temples of modern India’, the government has put in place a plan to suck liquidity from PSUs to finance its deficit. First, it has made clear that all upstream companies have to shoulder a larger share of the oil subsidy. Along with that, it has instructed profit-making oil PSUs to shell out higher dividends.

More importantly, the government has recently started its disinvestment drive via the new route of shares buybacks by PSUs. This move is clearly in a bid to meet its disinvestment target of Rs 40000 crore, as merely Rs 1300 crore has been collected via the divestment route till now. Hydropower major NHPC is the first company to have taken this option.

While these three routes may help the government to garner much-needed finances in these troubled times, the fact that it will jeopardise the financial health of these companies and hamper their expansion plans cannot be ignored.

“Buyback of shares by companies is not healthy for PSUs as our float is already very low and it will not make any difference to the market sentiment. At the same time, it will pull away the precious liquidity from the company, which will certainly hamper our future plans”, a Director of a Maharatna PSU told DSIJ.

Eating Away Into Companies’ Reserves

As per the government data, the top 17 public sector companies including Coal India, ONGC, NMDC and NTPC had cash reserves of around Rs 1.62 lakh crore. Of these, Coal India had the maximum reserves of Rs 43776 crore, while ONGC and NTPC had a cash balance of Rs 22450 crore and Rs 16185 crore respectively.

As for the government’s plan to milk these PSUs for cash, Coal India would be the first in line. The company would have to shell out around Rs 9000 crore towards share buybacks. Additionally, the government will divest its five per cent stake in the market via a follow-on public issue in December, providing an additional amount of around Rs 9000 crore to the exchequer.

The government has already approved the buyback of 8.89 per cent of NHPC’s shares at Rs 19.25 apiece, which will cost the company a total of Rs 2368 crore. What is important to note here is that the company currently has a cash reserve of just Rs 3000 crore. In fact, the company operates in the capital intensive hydro power sector that requires huge investment, and its balance sheet already has debts. Clearly, its plans may be hampered due to the shortage of fund and it may have to borrow money for its future projects.

“As the market conditions are not very encouraging for FPO or OFS issues of PSU companies, this (buyback) route will give the government an alternative to generate money at the cost of PSUs’ performance and future growth, which is not at all sensible”, comments a PSU CMD on condition of anonymity.

The government is mulling buybacks for many other PSUs like BHEL and IOC, though IOC has turned down a similar proposal in May this year, citing huge debt and the lack of spare money. A 10 per cent divestment plan in IOC via the OFS route is also being aggressively pursued, which can rake in around Rs 7000 crore during this fiscal.
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A Double Whammy For Oil PSUs

In the times as they are, oil PSUs have it particularly bad. On one hand, a declining currency has made the life of downstream companies like IOC, BPCL and HPCL tough enough due to ever-increasing import costs and high debts to finance subsidies. On the other, upstream companies like ONGC and Oil India are crippled by the huge discounts that they are providing to shoulder the oil subsidy. In FY13, the companies paid around Rs 60000 crore as their part of subsidy, and this figure is certain to be more in the current fiscal.

The subsidy share has thrown upstream companies’ financial health into disarray. While the government has estimated for oil subsidies worth Rs 65000 crore for FY14, the sharp decline in the rupee and increasing fuel costs mean that the burden is likely to be a whopping Rs 140000 crore, according to recent estimates.

In such a situation, the Finance Ministry is in no mood to contribute any additional amount towards oil subsidies, as it will inflate the already out of control fiscal deficit. Thus, upstream companies have been asked to up their contribution. ONGC and Oil India are being hit directly and in a big way. ONGC has given around Rs 26000 crore as subsidy discount during the first half of last year alone, while this was Rs 49000 crore for the whole of FY13. Oil India also paid Rs 4216 crore subsidy in the first half as against Rs 4094 crore contributed last fiscal.

Higher Dividend May Break PSUs’ Backs

There are currently 14 oil PSUs, and the subsidy burden is not the only reason why they are sulking. Recently, the Finance Ministry has come out with an instruction to all oil PSUs to pay at least 30 per cent dividend starting from the current fiscal itself. In the past, all profit-making companies in the sector had to pay 20 per cent dividend on the net profit or equity, whichever was higher. This step by the government towards higher dividends may help it to accumulate more funds and retail investors may also gain from it, but it is certainly an additional burden on the companies.

Where The Companies Stand

Experts feel that there is little that companies can do in the face of this tide. “We have to understand that government is the majority shareholder of PSUs and they have to abide by the government’s intent. PSU managements and minority shareholders may resent this, but there is nothing illegal about it. In my view, as the government needs more funds, cash-rich PSUs don’t have any option left but to contribute more”, says R S Sharma, former CMD, ONGC. “For ONGC, particularly, there is more trouble as the company may have to borrow money to finance its future projects and explorations. Due to the subsidy burden, the company may have to resort to its cash reserve to meet operational expenses”, he adds.

The Ministry of Oil also knows this. Recently, the Minister for Petroleum and Natural Gas, Veerappa Moily, wrote to the Finance Minister in this regard. In his communication, Moily clearly stated that subsidies were “having a huge negative impact on the ability of ONGC and (Oil India) to continue existing oil and gas discoveries”.

This unprecedented drive of the government to corner more funds from PSUs is also taking a toll on their performance on the indices. Over the past two years, where the Sensex made history to touch its all-time high surpassing psychological 21000 mark, gaining more than 20 per cent, while the BSE PSU index lost more than 22 per cent during the same period. Barring ONGC, all other PSU Maharatana companies lost heavily on the bourses (see table), leaving investors bleeding.