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Government may retain 52 per cent stake in VSNL

The government is looking forward to retaining at least 52 per cent stake in Videsh Sanchar Nigam Limited even after the proposed disinvestment and buyback issues that together are expected to mobilise around Rs 15 billion, government sources say.

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The buyback offer, capped at 7 million shares, will be done through book building and priced at a level between the prevailing domestic and GDR quotes.

In addition to the buyback, the Government also proposes to divest 11 million of its shares in VSNL through a GDR-cum-domestic offering.

Currently, the government owns 59.88 million of VSNL's fully paid-up and subscribed share base of 92.16 million shares, corresponding to equity holding of 64.97 per cent.

The issue before the government is whether to launch the buyback offer before the disinvestment or vice-versa.

If disinvestment takes place first, the government's stake in VSNL would fall from 64.97 per cent to 53.03 per cent.

Assuming that allotment during the subsequent buyback is made on proportionate basis (existing shareholders sells shares according to their respective stakes), the government will then be able to hawk only 3.71 million shares in the offer.

As against this, if buyback pre-dates disinvestment, the government will be able to sell 4.55 million shares to VSNL.

Therefore, if disinvestment comes first and the buyback follows at the current BSE price (which will be the natural floor), the government stands to lose about Rs 600 million.

But this loss would be minuscule if the initial buyback offer exerts a downward pressure on the price to be fetched in the subsequent disinvestment offering (as of now, the disinvestment is expected to fetch a higher price since it is to be pegged to the prevailing GDR rates).

Indeed, if the GDR price (Rs 995 per share) were to really slump to the BSE price of Rs 712 per share, the government would stand to lose Rs 3.11 billion on its disinvestment of 11 million shares.

The other argument favouring disinvestment prior to buyback is that the latter is a virtually risk-free operation, with the entire funds for buyback of shares coming from VSNL's internal accruals.

The company has, in fact, already decided that the Rs 5 billion odd funds required for buyback of its 7 million shares would come from its Rs 8.98 billion profit after tax recorded in 1997-98.

This, in a sense, is 'ready money' that can be deployed at any time.

Moreover, unlike a typical disinvestment issue where prospective subscribers have an incentive to beat down prices prior to the issue, there is little risk of this kind during a buy-back offer.

On the contrary, they would seek to perk up prices in this case, so as to command a better buy-back price from the company. On the other hand, a disinvestment in GDR markets is more vulnerable to market swings and the government cannot take a risk on the buy-back issue, adversely impacting the disinvestment price.

Apart from sequencing of the two issues, the government would also have to take a position on what is to be done in the event of the buyback option not being exercised by all shareholders.

If all shareholders participate in the buyback and sell in proportion to their holdings, the government's final stake in VSNL would be reduced to 52.05 per cent, assuming buyback predates disinvestment.

But if disinvestment happens first, the government's stake will end up marginally higher, at 53.03 per cent, even after buy-back. In either case, the possibility of the government selling more than around 4.6 million shares is remote, since this would automatically bring down its stake in the company below the 52 per cent figure.

In fact, supposing the government ends up as the sole participant in the buyback offer and sells the entire 7 million shares, its stake would dip to 49.17 per cent.

- Compiled from the Indian media

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