Govt nod to IOC, NTPC stake sale: 5 things to know

The Union Cabinet on Wednesday approved proposals to divest its 5 per cent stake in state-owned NTPC and 10 per cent in Indian Oil (IOC), which is likely to fetch the government over Rs 13,000 crore at current market price.

The disinvestment target in the annual Budget has been fixed at Rs 69,500 crore for the financial year 2015-16.

Here are five points that you need to know on disinvestment:

1.   Disinvestment is liquidation of government assets in order to raise funds. The disinvestment was initially started from the year 1991-92. However, the department of disinvestment was first set up on December 10, 1999 and was renamed as Ministry of Disinvestment on September 6, 2001.

2.   The objective of disinvestment is to reduce government stake in PSUs which were showing negative rate of return on the capital invested in them. It helped reduce the burden on government and raise public finances.

3. According to the government's disinvestment policy, the government has to retain major shareholding i.e. 51 per cent and management of the public sector undertakings. The government holds 74.96 per cent in NTPC and 68.57 per cent in IOC, according to the BSE data.

4.   The government has to strive to meet the disinvestment targets fixed in the annual budget. The last disinvestment target met was in the year 2003-04. The target was raising Rs 14,500 and the government managed to raise Rs 15,547 during FY 04.         

5.   The maximum disinvestment has been worth Rs 23,857 crore till date in FY 13 against the revised target of Rs 30,000 crore for that year.

While disinvestment helps ease burden on the government, it increases burden on investors.

"Ther is fear in the minds of investors. The fundamentals of these two companies are not so great, not growing consistently. With stake sale supply of shares will increase. People grab shares at premium prices also, but if the fundamentals of the companies are not growing consistently, there is nervousness in the minds of investors which leads to a negative sentiment on the stock exchange," G Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory Pvt Ltd told BT online.          

For instance, just after the Cabinet approved the proposal to disinvest its stake in NTPC and IOC, the former's stocks fell by 2.44 per cent trading at 138.05 per cent at 3.27 pm. IOC's stocks were traing at 334.05 at 3.29 pm up by 1.25 per cent.

According to Bombay Stock Exchange (BSE) data, the market capitalisation of NTPC stood at Rs 1,11,313.77 crore while that of IOC was Rs 79,321.21 crore on Wednesday.