Government may auction stake in ITC and L&T to achieve divestment target

NEW DELHI: The government is planning to auction holdings in cigarette maker ITC and engineering firm Larsen & Toubro (L&T) to make up part of the shortfall in the money it targeted to raise from disinvestment and alleviate the stress on finances.
The sale is expected to raise about Rs 35,000 crore, said two people aware of the plan. The government has more or less concluded that its holdings in the two companies are not of a strategic nature, that is, it has no role to play in their management.

"The Modi government does not want to hold equity in a company making cigarettes as official policy discourages tobacco consumption," said one of the persons. "Even the firms’ top executives are selling their stakes. Then why not the government, which ended up acquiring these stakes by default."

The government’s stakes in these firms are not held directly.

The stakes are held via SUUTI, a state-controlled entity that was created at the time of the bailout of the erstwhile Unit Trust of India (UTI) in 2001. SUUTI, or Specified Undertaking of UTI, owns 11.19 per cent of ITC and 8.34 per cent of L&T. Although L&T is engaged in the defence sector, holding on to the stake doesn’t make sense as it’s professionally managed and board driven, as is ITC.

"The government is likely to appoint a committee of senior officials of the finance ministry including the department of disinvestment to finalise the modalities and monitor the transactions," said one of the persons.

An announcement is expected shortly. SUUTI also owns around 12 per cent of Axis Bank but this holding is unlikely to be divested. The sources said top officials were of the view that the stakes should be sold using the auction route to maximise the government’s realisation from the exercise even though they did consider whether SUUTI could put the firms’ shares on tap in the open market.

"If someone is interested in buying the entire block, the government will not have any problem," the second person said. But Britain’s BAT Plc, which owns 29.74 per cent of ITC and has for long coveted SUUTI’s stake, would not be allowed to bid.

The government had set itself a record target of Rs 69,500 crore from asset sales in the current financial year, but has managed to raise just Rs 17,364 crore. A successful execution of the ITC-L&T sale plan could help the government hit theRs 50,000 crore mark for disinvestment receipts.

The combined value of SUUTI’s investment in ITC, L&T and Axis Bank is around Rs 44,800 crore, of which the stake in the cigarette-to-foods conglomerate is the most valuable at nearly Rs 25,735 crore. Besides SUUTI, state-run insurance firms together own a little over 21 per cent stake in ITC. None of the three – SUUTI, the insurers, BAT – are treated as promoters of the firm, which is widely regarded as a professionally well-managed company. SUUTI’s 8.34 per cent stake in L&T is valued at around Rs 8,300 crore.

The people cited above said that the view in the government was that in the current market environment, it would be easier to divest ITC and L&T because these stocks continue to attract investor interest. The department of disinvestment has issued mandates to divest minority stakes in 11 state-run companies including Coal India, ONGC, NTPC, Nalco, Hindustan Copper, BHEL and NHPC. Since most of these are in the battered commodities space, the feeling is that it will be difficult to sell these stocks in the current market environment.