PFC, NTPC stake sales hit borrowing clause hurdle
NEWDELHI: The government is facing hurdles in trimming its stakes in Power Finance Corp. Ltd (PFC) and NTPC Ltd, as the companies may breach a bond covenant that requires the companies to be majority-owned by the government. Reducing the government’s stake to less than 50% will also increase overseas borrowing costs for these companies, as they will lose their quasi-government status as borrowers.
NTPC and PFC are among state-run companies in which the government plans to reduce its stake by selling shares through its two exchange-traded funds (ETFs), a basket of securities that trade on exchanges. The government sells its stakes in listed central public sector enterprises (CPSEs) through the CPSE ETF and Bharat 22 ETF.
“We don’t have the necessary headroom now to raise a big amount through ETFs. We have asked the administrative ministry to examine the legal matter of bringing the stake below 50% in NTPC and PFC,” a finance ministry official said on condition of anonymity. “If it is an expensive and time-consuming proposition to get the clearance from overseas market regulators, then we will take out the two stocks from the ETFs.”
A former NTPC official said when the power producer sold overseas bonds, it gave an undertaking that if the government stake in the company comes down below 50%, then investors can withdraw their money. “NTPC has raised funds through bond issues worth ₹70,000 crore, planning for a period of 10 years. If investors start asking for their money back, then the firm has to be closed down. That’s why the government is not sure how to bring its stake below 50%,” the former official said.
PFC and NTPC, besides other companies in which the government owns more than 50%, also enjoy the status of quasi-sovereign borrowers. The implicit guarantee of the government reduces the cost of borrowing by
THE FIRMS MAY BREACH A BOND COVENANT THAT REQUIRES THEM TO BE MAJORITY-OWNED BY THE GOVERNMENT
selling bonds. Reducing the government’s stake to below 50% will increase the cost of selling bonds for these companies as investors will seek higher yields for the additional risks they take.
In September, PFC had scaled up the quantum of funds to be raised through overseas bond sales to $5 billion from $3 billion under its Global Medium Term Note Programme. In April 2017, NTPC had raised ₹2,000 crore through masala bonds under its $4 billion medium-term note programme for capital expenditure.
The Cabinet Committee on Economic Affairs on November 20 approved a proposal to bring down its stake in select CPSEs to under 51% on a case-to-case basis. The Centre’s stake in NTPC has come down from 56.4% in June to 54.5% at the end of the September quarter, while in PFC, its stake has fell from 59.05% in June to 56.16% in the September quarter.