Dubai-based Damas’ venture on retail trading in jewellery and Paris-based Groupe Danone’s plans to re-enter the food and beverage sector after quitting Britannia earlier this year are among the 23 foreign direct investment (FDI) proposals cleared by the government on the recommendations of the Foreign Investment Promotion Board (FIPB). The proposals entail a total FDI inflow worth Rs. 564.80 crore.
According to an official statement here on Tuesday, Damas is to set up a joint venture with Gitanjali Lifestyles for single-brand retail trading in jewellery. The 51 per cent foreign equity participation in the venture is projected to bring in Rs 180 crore as FDI. As per its plans, the proposed venture would open about 100 outlets in three years with an investment of more than Rs. 300 crore.
Danone’s proposal on investment in food and beverages, mineral water, biscuits, cereals, dairy products, baby foods and medical nutrition, however, does not indicate any FDI component in the venture as the company for the Indian operations is yet to be incorporated. The French company may either go it alone or operate through new as also its existing joint ventures in these sectors. It may be recalled that earlier this year, Danone had sold its entire stake in Britannia Industries to the Nusli Wadia group.
Among other approvals, Lazard India Mauritius has received the government’s nod to invest Rs. 125 crore in the units of Lazard India Growth Fund.
Sanlam Investment of South Africa has received permission to bring in Rs. 43.40 crore in foreign exchange for the issue of warrants and conversion of its operating company into an operating-cum-holding company to make further downstream investments while Bay-Forge has also got the go-ahead to increase its FDI participation up to 100 per cent by issuing partly paid-up equity shares worth Rs. 21.42 crore.
On FIPB’s recommendation, the government, however, deferred its decision on 13 proposals, including United Breweries, G4s Corporate Services and Morgan Stanley were rejected.
The government is planning to infuse Rs 16,000 crore in over a dozen public sector banks by subscribing to equity shares through right issues. The move is aimed at bolstering banks' capital base and help them meet the domestic financing requirements.
United Bank of India, Dena Bank [Get Quote], Bank of Maharashtra [Get Quote] and IDBI Bank are expected to be among the next set of banks whose capital infusion proposals will be taken up.
In her address to Parliament on Thursday, President Pratibha Patil talked about the government's plans to recapitalise public sector banks.
While all public sector banks have over 9 per cent capital adequacy ratio, the government intends to provide them capital to help them step up lending as funding from overseas sources has dried up due to the global credit crisis. The 51 per cent floor on government ownership is limiting the ability of these banks to access capital markets to raise fresh equity. Though even the Reserve Bank of India has talked about the need to lower the floor, the President on Thursday said the government intended to maintain its holding in public sector companies at above 51 per cent.
The government had earlier said that it intended to provide around Rs 20,000 crore recapitalisation over two years. It has already provided over Rs 3,800 crore to Punjab & Sind Bank, Vijaya Bank [Get Quote], Central Bank of India and Uco Bank [Get Quote] to help shore up their capital adequacy ratio. In addition, the government had provided Rs 10,000 crore to State Bank of India [Get Quote] in March 2007 by subscribing to its rights issue. The Rs 16,000 crore to be provided now does not include the Rs 20,000 crore that the SBI has sought afresh.
Between 1985-86 and 2000-01, the government had provided public sector banks Rs 20,446 crore, but it was largely meant to help them clean up the balance sheet and raise their capital adequacy levels.
Sources in the government said that negotiations with the World Bank to raise around Rs 16,000 crore long-term debt were in advanced stages.
They added that in a majority of the cases, fund infusion would take place through a rights issue.
The government, as promoter of these banks, was expected to subscribe the entire right issues in case the public refused to participate. "Besides bolstering the net worth, the move is aimed at increasing government holding to above 60-65 per cent, depending on the participation from the public, so that if these banks want to raise funds in future, they can do follow-on issues," said a source.
The proposed recapitalisation by the government will also bolster the net worth of the banks and help them leverage it to raise more funds. "Since it is Tier-I capital, banks will be able to leverage it by over 10 times. This in effect means that banks can borrow 10 times of Rs 16,000 crore, equivalent to Rs 160,000 crore (in the form of deposits). This will increase the availability of money for corporate houses," the executive director of a leading public sector bank said.
In addition, the government has already allowed India Infrastructure Finance Company (IIFCL) to raise Rs 40,000 crore through tax-free bonds, which would be used to provide re-finance facility of up to 60 per cent of the loan given by banks to infrastructure sectors. This would help implement projects worth Rs 1,00,000 crore provided they had a debt-equity ratio of 75:25.
Once these two avenues open, there could be flows of nearly Rs 2,00,000 crore into the banking system, which in turn would be available for the India Inc. The proposed infusion in the form of equity would also help these banks take large size projects in sectors such as power and infrastructure, bankers said.
The Union finance ministry is examining a proposal that seeks to dilute the government's stake in all listed public sector undertakings to at least 90 per cent.
The proposal is an offshoot of the government thinking that there is no need for a big-bang approach to PSU disinvestment. In fact, the new government's agenda for action, finalised by the Cabinet secretariat, had recommended that public sector disinvestment should take place in small doses.
There are about a dozen listed public sector undertakings (PSUs) in which the government's stake is between 90 and 99 per cent. However, given the current buoyancy in stock market prices, the government could raise more than Rs 25,000 crore if it offloaded up to 10 per cent stakes held in these PSUs, a senior finance ministry official said.
The official's estimate of disinvestment proceeds from these PSUs is conservative. At current stock market prices, the government can mobilise around Rs 37,000 crore by selling up to 10 per cent in only the top ten PSUs in which it owns over 90 per cent.
The government's argument is that the Securities and Exchange Board of India's regulations stipulate that all listed companies must have a minimum floating stock of 10 per cent of total equity. The proposed disinvestment in these dozen-odd companies could also be justified as a requirement under Sebi regulations, the official said. Also, disinvestment up to 10 per cent in listed PSUs are least likely to cause any controversy or provoke political opposition.
The dilution of stakes in such PSUs will be one of the major initiatives of the new disinvestment policy expected to be announced in the Union Budget for 2009-10 in the first week of July. The policy will outline the government's blueprint for disinvestment and closure of sick and unviable PSUs.
WHAT'S AT STAKE
Company
Total outstanding
In shares (mn)
Govt stake
Disinvested shares
(in million)
Price per share
(in Rs) on Jun 3
in %
in shares (mn)
Hindustan Copper
925.22
99.59
921.42
3.79
270.70
MMTC
50.00
99.33
49.67
0.34
28271.15
HMT
760.35
98.88
751.83
8.52
74.34
NMDC
3964.72
98.38
3900.49
64.23
412.00
FACT
354.77
98.11
348.07
6.71
52.45
National Fertilisers
490.58
97.64
479.00
11.58
79.65
Scooters India
42.99
95.38
41.01
1.99
25.05
Andrew Yule & Co
296.33
94.42
279.79
16.54
56.30
Neyveli Lignite
1677.71
93.56
1569.67
108.04
136.60
ITI
288.00
92.98
267.78
20.22
41.15
RCF
551.69
92.50
510.31
41.38
81.59
STC India
60.00
91.02
54.61
5.39
366.45
Shareholding pattern as on 31st March 2009
Source: Business Standard Research Bureau
Current disinvested equity calculated on total outstanding shares minus government stake
Internal discussions within the finance ministry on the broad contours of the disinvestment policy have still not concluded. A general consensus, however, has been reached on the proposal to allow listed and unlisted PSUs to tap the capital market to meet their funds requirements, as long as the total government equity in these does not fall below 51 per cent.
One of the issues on which no clarity has emerged is the manner in which the unlisted PSUs will be allowed to tap the capital market with an initial public offer. A section within the ministry is of the view that allowing unlisted PSUs to tap the capital market would not necessarily result in any proceeds for the central exchequer and not help meet the government's fiscal deficit. Hence, such IPOs should be structured in a manner that will enable the government to also divest its stake and mobilise resources to reduce the fiscal deficit.
A contrary view in the ministry is that PSU disinvestment should not be used as an instrument to meet the government fiscal deficit. Instead, it should be used to subject the PSUs to market discipline so that its management can measure its performance through the yardstick of its stock valuation in the open market. Such a view also supports more listed PSUs to float new stock to raise resources from a reviving stock market.
Disinvestment of government equity in PSUs has become an important agenda item for the Budget team in the finance minister after the strong endorsement it received from several industrialists who met Finance Minister Pranab Mukherjee two days ago during a pre-Budget meeting. These industrialists had argued that the finance minister should allow the PSUs to tap the capital market to meet their individual funds requirement for expansion plans.
