Divesting to bridge the deficit

The government could recompense retail investors by selling its shares in SUUTI exclusively to them. Retail investors will get to own some blue chips, and the capital market will get some depth.

The Special Undertaking of Unit Trust of India (SUUTI, for short), formed specifically to take over the regular income schemes of the Unit Trust of India, has been in the news recently. Reversing an
earlier decision to form an asset management company to take it over, the Cabinet Committee on Economic Affairs recently decided to encash some blue chip shares held by it. The earlier proposal, while being technically and theoretically sound, would be time-consuming and will not suit a government in a great hurry to raise money to bridge its deficit by March, A divestment of some of SUUTI’s prized shareholdings, on the other hand, will be a quicker way to meet fiscal targets. The government holds through SUUTI 20.72 per cent of Axis Bank with a market value of over Rs.8,060 crore. It also owns 11.3 per cent of ITC (Rs.19,800 crore) and 8.2 percent of L&T (Rs.6,640 crore). A sale of these would fetch the government over Rs.34,500 crore at current prices. Assuming that the modalities of the sale could be gone through in the remaining less-than two months of the current fiscal year, the disinvestment target of Rs.40,000 crore will be very nearly met. Though the 2G spectrum auctions are on course to exceed initial expectations, the boost in disinvestment proceeds will strengthen government finances and make the target of reining in fiscal deficit at less than 4.8 per cent of GDP that much easier.

That said, it is important to choose the correct method of selling these shares. The objective is not only to meet financial targets but also fulfil some of the broad objectives of the disinvestment programme. Over the years, the government had adopted ingenious methods to meet its disinvestment targets, including sale to state undertakings, buybacks, cross-holdings, special dividends and setting up of exchange-traded funds. None of these benefit the common man. The disinvestment programme has theoretically espoused retail investors’ interests. The vision statement of the Department of Disinvestment seeks to “promote people’s ownership of shares through disinvestment” and spread the equity culture. Over the years, however, the government has ignored retail investors, offering them mere token incentives such as a small discount in the few share offerings of public sector companies. In contrast, large investors have benefited substantially. In fact, the capital market regulator SEBI introduced new schemes that completely bypassed small shareholders. The government could recompense retail investors by selling its shares in SUUTI exclusively to them. That way, retail investors will get to own some blue chips, and the capital market will get some depth.