Kalia_Test Posted March 22, 2015 Posted March 22, 2015 Mods - This is a post on pure economics and financial jugglery. It has been done by NDA but has nothing to do with politics. Hence kindly let it remain in CC section :two_thumbs_up: This might be a little difficult for people with not much financial knowledge but feel free to ask any question.. OK...I learnt about this when a couple of days ago, my colleague told me happily that he will get some bonus debentures from NTPC as he was a shareholder. I was surprised and thought I will find out what this is about over the weekend. Did a bit of research and was absolutely amazed at the wizadry of Arun Jaitley ( or his advisors ). Story below - I will try and summarize in bullet points 1. Govt needs more money to reduce its fiscal deficit and as we all know, selling Govt stake in PSUs is an option that every Govt pursues. 2. One straight-forward option is for the Govt to sell shares through OFS but the market is clever and depresses the share value. 3. NTPC is a profitable PSU with truckloads of cash - about 72K crores of cash in its books when I see its annual report. How can Jaitley let go of this cash cow :--D 4. Promoter ( Govt stake ) of NTPC is 75%. Now the game begins for Jaitley - How can I get that money from NTPC into my pocket :nervous: Govt needs about 10,000 crores from NTPC this fiscal.. Option 1 : Sell shares worth 10K crore..naa..share price is depressed and why should Govt lose stake on a profitable PSU for peanuts? Option 2 : Get NTPC to declare a dividend from its reserves so that Govt gets 10K crore...OK option but NTPC will have a cash outgo...Is there anything better....( advisors whisper to Jaitley :secret: ) Enter the master plan Option 3 : Get NTPC to issue "bonus" debentures :hatsoff: How it works? ( from NSE announcements ) - For each share of NTPC , a shareholder will get one "bonus" debenture with face value 12.50 . NTPC will redeem the face value in chunks - Rs. 2.50 in March 2023, Rs. 5 in March 2024 and Rs. 5 in March 2025 Interest will be paid on the debenture at the rate of 0.5% above Govt's 10 year yield so effective yield will be around 8.2 to 8.5. The debenture will be listed on the exchanges ( why will it not be - story is unfolding :two_thumbs_up: ). OK...now bonus debentures are considered as "deemed dividends" so NTPC has to pay out Dividend distribution Tax...To whom? Govt :yay:...Will Govt have to pay tax on this income.....ha ha no govt pays tax on its own income - he he In summary, Govt gets about 7800 crore worth of debentures + 2000 crore of DDT - mission accomplished :- 1. Without selling any stake in NTPC 2. Without NTPC having to shell out huge money at a single go Wonderful :omg: Now what to go with the debenture paper is what Jaitley asked .... Enter the giant LIC ( Life Insurance Corporation ) of India Sell the NTPC debenture paper to LIC and take the cash....:ohmy: ------------------------ Small retail shareholders will hold the debenture paper with no liquidity in exchanges and token rupees every year as interest and principle starting 2023 :finger:
randomGuy Posted March 22, 2015 Posted March 22, 2015 Nice post as usual Kalia! Moral of the story - almost never buy PSU stocks. There is always the dividend option but what Govt. did was effectively to have the small shareholders' money (the dividend money) invested for 10 years .
G_B_ Posted March 22, 2015 Posted March 22, 2015 its not just his financial genius. He has managed the floor for the BJP extremely well in getting major reforms through in the Rajya sabha. In a way i am happy he lost from Amritsar.
G_B_ Posted March 22, 2015 Posted March 22, 2015 btw excellent post. I enjoyed reading that. Very informative.
Kalia_Test Posted March 22, 2015 Author Posted March 22, 2015 Nice post as usual Kalia! Moral of the story - almost never buy PSU stocks. There is always the dividend option but what Govt. did was effectively to have the small shareholders' money (the dividend money) invested for 10 years . Absolutely... I am not sure if you are aware but the BIGGEST and most clever and INNOVATIVE financial jugglery in Indian history was done by the Master Economist, former Governor of RBI, former Finance Minsiter and former Prime Minister ...Shri Shri Manmohan Singh ji.... What Jaitley did was a small Indian rope trick...MMS did the train vanishing act of PC Sarcar :hatsoff:
randomGuy Posted March 22, 2015 Posted March 22, 2015 BTW if govt. decides to list LIC, it will take care of fiscal deficit for a long time. But it will dry up liquidity for rest of the stocks because it will be such a huge IPO.
G_B_ Posted March 22, 2015 Posted March 22, 2015 BTW if govt. decides to list LIC' date=' it will take care of fiscal deficit for a long time. But it will dry up liquidity for rest of the stocks because it will be such a huge IPO.[/quote'] whats the market value of LIC?
Kalia_Test Posted March 22, 2015 Author Posted March 22, 2015 BTW if govt. decides to list LIC' date=' it will take care of fiscal deficit for a long time. But it will dry up liquidity for rest of the stocks because it will be such a huge IPO.[/quote'] Govt will never list LIC...Why? 1. Govt needs LIC to buy the shares and bonds of other PSUs periodically and support market during crashes...A listed company cannot be ordered to do that ( SEBI laws and litigations by minority shareholders will be a big headache ). 2. LIC buys all other PSU shares from Govt in rights, FPOs, OFS, etc. Who will/can buy LIC?:cantstop:
randomGuy Posted March 22, 2015 Posted March 22, 2015 whats the market value of LIC? http://wap.business-standard.com/article/companies/at-rs-5-lakh-cr-lic-to-be-india-s-most-valuable-firm-if-listed-114061101114_1.html Now arnd 5.5 lac crore maybe
Sachin=GOD Posted March 22, 2015 Posted March 22, 2015 Excellent post. Do keep updating us about such things :nice:
randomGuy Posted March 22, 2015 Posted March 22, 2015 Govt will never list LIC...Why? 1. Govt needs LIC to buy the shares and bonds of other PSUs periodically and support market during crashes...A listed company cannot be ordered to do that ( SEBI laws and litigations by minority shareholders will be a big headache ). 2. LIC buys all other PSU shares from Govt in rights, FPOs, OFS, etc. Who will/can buy LIC?:cantstop: Point#1 is more relevant I suppose which is why they haven't listed it as yet. It(the possible listing) keeps making the news every couple of years though
Kalia_Test Posted March 22, 2015 Author Posted March 22, 2015 Point#1 is more relevant I suppose which is why they haven't listed it as yet. It(the possible listing) keeps making the news every couple of years though Yes...The one time money that Govt will get is going to be HUGE and there is always temptation in listing LIC but over a period of time, LIC can help Govt more by remaining unlisted. From your link, there seem to be issues around employees, pension,etc also - not to talk about the lakhs of your neighborhood "LIC agents" who might also be affected once it is listed and made accountable for the commission it pays to agents,etc. Lot of scrutiny will happen and a shareholder activist fund like say Aberdeen fund ( FII ) will create a global fuss. Domestic mutual funds and retail cannot absorb more than 7-8 % of LIC at max so it will have to be foreigners that need to buy. Please note that LIC holds almost all PSUs like SBI, NTPC, Coal India,etc and they may not be able to buy LIC due to cross-holding rules. The new Insurance Bill raising FDI limit to 49% is interesting though. Who knows what the powers are thinking?
randomGuy Posted March 22, 2015 Posted March 22, 2015 Yes...The one time money that Govt will get is going to be HUGE and there is always temptation in listing LIC but over a period of time, LIC can help Govt more by remaining unlisted. From your link, there seem to be issues around employees, pension,etc also - not to talk about the lakhs of your neighborhood "LIC agents" who might also be affected once it is listed and made accountable for the commission it pays to agents,etc. Lot of scrutiny will happen and a shareholder activist fund like say Aberdeen fund ( FII ) will create a global fuss. Domestic mutual funds and retail cannot absorb more than 7-8 % of LIC at max so it will have to be foreigners that need to buy. Please note that LIC holds almost all PSUs like SBI, NTPC, Coal India,etc and they may not be able to buy LIC due to cross-holding rules. The new Insurance Bill raising FDI limit to 49% is interesting though. Who knows what the powers are thinking? Seems there are even more issues with listing in current form I guess they can alter the structure. Let LIC be holding company which holds equity of insurance biz., MF biz., housing finance biz., and shares of other PSUs like SBI, ntpc etc. And then list the insurance biz. as a subsidiary. EDIT: But, insurance biz. would be the most cash generating biz and that cash wont be able to freely buy the shares and bonds of other PSUs periodically because of SEBI laws and litigations by minority shareholders as you mentioned in point#1.
amiret Posted March 22, 2015 Posted March 22, 2015 Just taking money out of one pocket and putting it into another What would have been a cash outgo for NTPC is now an outgo for LIC along with many naive investors. LIC was also made to bail out the Govt by subscribing to a large chunk Coal India's Public Issue 2 months ago . But LIC made many smart investments 2 years ago and booked huge profits recently so it can afford to. Remeber Coal India had come up with a large special dividend last year to help Chiddu bridge the fiscal deficit. Govt could have done the same in case of NTPC and rewarded existing shareholders which include many small investors. PSU's will never become truly competitive . The PSU banking sector trudges along with huge NPA's , need for fresh capital and a continuous loss of market share to PVT players. People who voted for PM modi continue to hope that his statement "government has no business to be in business" does not remain a chunavi Jumla.
randomGuy Posted March 22, 2015 Posted March 22, 2015 ^ NPA issues is long term execution related and will take a long time. Immediately what they should do is to merge all these small PSU banks (PSB, syndicate, dena, allahabad etc etc) into fewer banks. Efficiency will improve
zen Posted March 22, 2015 Posted March 22, 2015 Good short term move .... However, the govt. will have to focus on organic ways to meet the deficit
vvvslaxman Posted March 22, 2015 Posted March 22, 2015 http://profit.ndtv.com/news/market/article-why-ntpc-is-giving-bonus-debentures-to-shareholders-717445
vvvslaxman Posted March 22, 2015 Posted March 22, 2015 I am trying to understand bonus debentures from this piece of article http://www.moneylife.in/article/what-are-bonus-debentures/39967.html
Kalia_Test Posted March 22, 2015 Author Posted March 22, 2015 I am trying to understand bonus debentures from this piece of article http://www.moneylife.in/article/what-are-bonus-debentures/39967.html Bhai...I consider myself a medium level analyst in these things... I always try to simplify things as I can never understand complex financial jargon inspite of spending more than a decade on these.. There are very subtle differences between bonds and debentures but in India - consider them same...It is nothing but IOU I owe you... So a debenture means that NTPC is PROMISING the holder of the debenture that :- 1. It WILL pay interest at the rate specified 2. It WILL buyback the debenture at the specified price on the specified date. This PROMISE is backed by all its ASSETS and cash i.e just like a bond, this promise HAS TO BE MET before shareholders even get a dividend. "Bonus" is simply a term used to imply that shareholders will get for free. There are obviously debentures issued by companies that people have to BUY.. Did you have anything else in mind?
Recommended Posts