LIC and BPCL may be tough sell, but buybacks are not the answer

As we enter the fourth month of the fiscal year 2020-21, it is time to look back at where the government stands with respect to its disinvestment targets. Of course, the first quarter was a freak quarter, but targets are still targets.

What happens to LIC IPO

As of now there is little clarity on the LIC IPO. However, the government has already started the process where lead managers have been asked for quotes and for the regulatory changes needed for the IPO. Market conditions may not be salutary but Jio Platforms has proved that if the idea is right then fund availability is never a constraint. For the time being, it is hard to envisage how an Rs.100,000 crore IPO can be seen through. But LIC has the big brand, although valuations could be an issue.

What about BPCL and Air India?

This is likely to be a little more complex. For example, the global airline industry is almost looking at a lost year. Even when the miasma of the pandemic goes out, it is not clear if airlines will be the same or the models will drastically change? Air India already sits on a pile of losses and debt; so selling the airline may be a Herculean task. For BPCL, the issue may be more about valuations. With crude prices still around $40/bbl, inventory losses could be a major issue. The million dollar question is whether BPCL should be sold at such valuations?

Government in Catch-22

The government may actually find itself in a Catch-22 situation. It needs to raise money to fund its stimulus program. At the same time, the market is not really conducive for aggressive disinvestment. With the fiscal deficit already above 5% and threatening to go above 6%, there is a limit to how much the government can borrow from the market. The RBI reserves have been largely depleted and deficit financing by the RBI has already begun. The need of the hour is to get genuine inflows at a time when tax and GST collections are already under pressure. That is why, the government is now talking about raising Rs.20,000 crore via Coal India and IDBI Bank.

Avoid the buyback temptation

If divesting BPCL and LIC is going to be tough, selling a stake in CIL and IDBI Bank is not going to easy either. The one option that the government is likely to look at is a buyback. Coal India has adequate cash reserves but using that for buybacks jeopardizes the expansion plans of the company. It is time to allow CIL to function like a listed enterprise. The bigger problem may be IDBI Bank. In this case, LIC may have to fund the buyback, which will only make the IPO of LIC less attractive. The government has deployed buybacks and special dividend route in the past. In the midst of the pandemic pressures, that is a route that is best avoided.