a brilliant financial engineering solution to lower india’s fiscal deficit f
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8/3/2019 A brilliant financial engineering solution to lower India’s fiscal deficit f
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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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