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A brilliant financial engineering solution to lower Indias fiscal deficit for FY 2011-12 Mostly Economics

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A brilliant financial engineering solution to lower Indias fiscal deficit for FY 2011-12
I just did a review of Govts finances after the second supplementary demand for expenditure. Like most others, the post sia situation is pretty grim. The exp to be higher and rev lower leading to a much wider fiscal deficit. How much was anyones 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 budget deficit, 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 identified before a public announcement. The company will use the proceeds to buy the governments stakes in state-run firms, the officals said. The new holding company will pledge the stakes and real estate properties transferred to it from the Specified Undertaking of the Unit Trust of India, an agency formed in 2003. The state-run firm will be wound up within 3 weeks and the assets will be transferred to the new company, the officials said.

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http://mostlyeconomics.wordpress.com/2011/12/22/a-brilliant-financial-engineering-solution-to-lower-indias-fiscal-deficit-for-fy-2011-12/[23-Dec-11 11:10:53]

A brilliant financial engineering solution to lower Indias fiscal deficit for FY 2011-12 Mostly Economics

Actually, there was another press release on 6 Dec 11 in BS which Follow reports a ICICI Sec study which proposed this plan:

Last month, ICICI Securities had suggested a plan to mop Rs 46,171 crore from buyback of securities, strategic Get every new post delivered crosspurchases and secondary sale of equity in these units in the to your Inbox. immediate to medium term. It had suggested raising Rs 22,941 crore from monetising the portfolio of Suuti, besides 190 other followers Join looking for banks and insurance companies for possible selloffs.

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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 Sign me up! holdings in these companies is Rs 18,983 crore, Rs 6,251 crore and Rs 9,786 crore, respectively, according to the ICICI paper. Powered by WordPress.com The idea was for Suuti to exit from all the stocks after the bifurcation. In earlier years, too, the government considered selling its stake in these institutions held by Suuti, but the plan 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 dont 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 comesThough 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 superbGreece and Portugal should take some lessons.. The day of reckoning for Indian fisc might still be awayIt may not happen this year as most expect

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

http://mostlyeconomics.wordpress.com/2011/12/22/a-brilliant-financial-engineering-solution-to-lower-indias-fiscal-deficit-for-fy-2011-12/[23-Dec-11 11:10:53]

A brilliant financial engineering solution to lower Indias fiscal deficit for FY 2011-12 Mostly Economics
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2 Responses to A brilliant financial engineering solution to lower Indias 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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http://mostlyeconomics.wordpress.com/2011/12/22/a-brilliant-financial-engineering-solution-to-lower-indias-fiscal-deficit-for-fy-2011-12/[23-Dec-11 11:10:53]

A brilliant financial engineering solution to lower Indias fiscal deficit for FY 2011-12 Mostly Economics

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