* Govt aims to raise $5.9 bln in stake sales this year
* BHEL shelves plan for share sale worth up to $1 bln
* Indian Oil share sale on pause since 2010
* India needs stake sales to ease fiscal deficit
By Sumeet Chatterjee and Tony Munroe
MUMBAI, April 6 India is not making life easy
for itself as it looks to sell-off stakes in state companies to
help plug a yawning budget gap, with New Delhi's own policies
battering sentiment towards government enterprises even as it
readies more for market.
This week the government ordered state-run Coal India
to sign guaranteed supply pacts with power producers
at below-market prices, raising the hackles of British activist
investor The Children's Investment Fund Management (TCI).
TCI, which owns 1 percent of Coal India, the world's largest
coal miner, plans legal action against it for not protecting
minority shareholder interests.
The coal order follows a proposal in last month's budget to
lift tax on oil production that will knock $978 million from Oil
and Natural Gas Corp's pre-tax profit. That came weeks
after a messy government selldown of a $2.5 billion stake in
ONGC that ended up mostly in the hands of a state insurer.
"It will be difficult for the government to find buyers of
shares in the public sector firms after the recent decisions,"
said Juergen Maiar, a Vienna-based fund manager with Raiffeisen
Euroasien Aktien, which owns Indian shares worth $300 million,
including a stake in ONGC.
"The interference by majority shareholders is not new, but
how can the government set a very high divestment target and
take decisions that will definitely hit companies' profit," said
Maiar, who does not plan to add to his state holdings.
The budget made headlines with provisions that could
retroactively tax long-completed mergers, potentially putting
Vodafone Plc back on the hook for more than $2 billion
in tax, despite a win in India's Supreme Court in January.
The British mobile operator had fought a 5-year legal battle
against the tax demand over its acquisition of Hutchison Whampoa
Ltd's Indian mobile assets in 2007.
Uncertainty over another budget proposal that could tax
foreign institutional investors has also spooked overseas funds,
which typically buy the majority of large Indian equity sales.
"It's counterintuitive to see the government making life
difficult for public sector companies, and foreign investors for
that matter, while it is in desperate need for cash and foreign
funding," said Michiel van Voorst, a fund manager at Robeco in
Hong Kong, which manages $400 million in India.
India, expected to struggle to meet a target to cut its
fiscal deficit to 5.1 percent of GDP from 5.9 percent, aims to
sell 300 billion rupees ($5.9 billion) of state shares this
fiscal year after raising just 140 billion rupees in the year
just ended, less than half its 400 billion rupee goal.
The target looks harder to reach after Bharat Heavy
Electricals, India's biggest power equipment maker,
this week withdraw plans for a share sale expected to raise
roughly $1 billion for the government. BHEL has been hard-hit by
delays in the construction of power plants due to red tape and a
lack of coal.
India's cash-strapped government uses state companies both
to raise funds and as policy instruments.
"Our hands are tied and feet are shackled, and then we are
asked to run and win the Olympics," said a senior executive at a
large state company, who declined to be identified given the
sensitivity of the matter.
TCI partner Oscar Veldhuijzen said Coal India could earn a
further $20 billion in pre-tax profit a year if it priced coal
at market rates.
"They are sort of hiding themselves behind the definition of
public interest. In our opinion, it is very clear that the
government is not acting in the public interest," he said. "They
are destroying the appetite in the capital market for PSUs
(public sector undertakings)."
Just as Coal India, which raised $3.5 billion in 2010 in
India's largest IPO, must sell output at below-market prices,
state oil companies carry a heavy and unpredictable burden
selling subsidised products.
New Delhi has waited more than a year to sell a chunk of
Indian Oil, India's largest oil retailer, which
haemorrhages money selling subsidised fuel. It posted a record
loss in the September quarter, and its shares are down 33
percent since shortlisting banks for the offering in late 2010.
While petrol prices are deregulated, state refiners are
under pressure from an embattled government not to raise prices.
State companies are run for the government's benefit, said
David Cornell, managing director in Mumbai for UK-based fund
manager Ocean Dial Advisers, which manages about $150 million in
"They just happen to list on the expectation of future
improvement in the treatment of minority shareholders, but when
the government is short of money it's not going to happen."