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A brilliant financial engineering solution to lowerIndia’s fiscal deficit for FY 2011-12

I just did a review of Govt’s finances after the second

supplementary demand for expenditure. Like most others, the postsia situation is pretty grim. The exp to be higher and rev lower

leading to a much wider fiscal deficit. How much was anyone’s

guess.

However knowing fiscal mathematics and government innovation,

one knows something will come. One major item for such

innovation was disinvestment figure. Govt budgeted Rs 40ooo cr

but so far just around 2500 cr in the kitty. So there were

suggestions from Mohandas Pai that government should ask cash

rich PSUs to declare aggressive dividends. This was opposed by

SS Aiyar saying govt should not fritter away gains in commodity

booms.

Now comes this wire from Bloomberg on another new plan. I must

say upfront this is just speculation so far and coule be completely

false. However, the mechanism is just brilliant fin eng:

India plans to borrow as much as 500 billion rupees ($9.5

billion) using land and shares as collateral to bridge a budgetdeficit, two government officials with direct knowledge of the

matter said.

The South Asian nation will set up a fund manager by Jan. 15

that will pledge stocks it holds in non-state companies

including ITC Ltd. (ITC),Axis Bank Ltd. (AXSB) and Larsen & Toubro Ltd. (LT), the officials said declining to be identifiedbefore a public announcement. The company will use the

proceeds to buy the government’s stakes in state-run firms,the officals said.

The new holding company will pledge the stakes and realestate properties transferred to it from the Specified

Undertaking of the Unit Trust of India, an agency formed in2003. The state-run firm will be wound up within 3 weeks and

the assets will be transferred to the new company, theofficials said.

Foll

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Actually, there was another press release on 6 Dec 11 in BS which

reports a ICICI Sec study which proposed this plan:

Last month, ICICI Securities had suggested a plan to mop Rs46,171 crore from buyback of securities, strategic cross-

purchases and secondary sale of equity in these units in theimmediate to medium term. It had suggested raising Rs22,941 crore from monetising the portfolio of Suuti, besides

looking for banks and insurance companies for possibleselloffs.

Suuti holds 11.54 per cent in ITC Ltd, 8.27 per cent in Larsen

& Toubro and 23.58 per cent in Axis Bank. The value of holdings in these companies is Rs 18,983 crore, Rs 6,251crore and Rs 9,786 crore, respectively, according to the ICICI

paper.

The idea was for Suuti to exit from all the stocks after thebifurcation. In earlier years, too, the government considered

selling its stake in these institutions held by Suuti, but theplan was shelved. Selling Suuti stake in private companies can

help the government meet its disinvestment target.

The new version is even better. It works like this:

» Govt transfers the above listed assets held by SUUTI to a new fund.

It may not want to sell these assets as these are all good quality

companies and have no major promoters. It might not want some

other player holding a major stake in these companies

» These assets to be pledged to a bank and money raised.

» It then sells its stakes in various PSUs to this new fund and gets the

money.

» So in a flash, you get the money to manage fisc and meet disinv

targets. And who knows the targets could be overshot!

» And then you also don’t end up selling shares in these important cos.

As economy improves, government can buy the PSU stakes back…

Amazing jugglery and engineering to manage the fiscal..Each year

something like this comes…Though execution will be a task.

Pledging land etc is a task which takes a long time. Cannot be

done in 2 months before the budget..But even then, this is

superb…Greece and Portugal should take some lessons..

The day of reckoning for Indian fisc might still be away…It may

not happen this year as most expect…

 

This entry was posted on 22/12/2011 at 5:19 pm and is filed under Indian

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2 Responses to “A brilliant financial engineering solution

to lower India’s fiscal deficit for FY 2011-12”

lp  Says:

22/12/2011 at 6:35 pm | Reply

Hi i have a small doubt,may look silly ..

  “if govt pledges stake and gets money to meet the targets..how does it

repay back to get the stake back? from where will the money come for it?” 

maheep Says:23/12/2011 at 2:44 am | Reply

4G auctions maybe!!!

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