Tag: disinvestment

CBDT, BFSI News, ET BFSI

Banking & Finance

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In order to make disinvestment deals of ailing state-owned firms more attractive for strategic investors, the government on Friday allowed erstwhile public sector companies to carry forward losses to be set off against future profits. The Central Board of Direct Taxes (CBDT) in a clarification said that Section 79 of the Income Tax Act shall not apply to an erstwhile public sector company which has become so as a result of strategic disinvestment.

“Accordingly, loss incurred in any previous year prior to, and including, the previous year of strategic disinvestment shall be carried forward and set off by the erstwhile public sector company,” the CBDT under the Finance Ministry said in a statement

The relaxation, it added, will cease to apply from the previous year in which the company, that was the ultimate holding company of such erstwhile public sector company immediately after completion of the strategic disinvestment, ceases to hold 51 per cent of the voting power of the erstwhile company.

Section 79 of the Income Tax Act deals with carry forward and set off of losses in case of companies.

“In order to facilitate the strategic disinvestment, it has been decided that Section 79 of the Income-tax Act, 1961, shall not apply to an erstwhile public sector company which has become so as a result of strategic disinvestment,” it said.

Necessary legislative amendments for the above decision shall be proposed in due course of time, the statement said.

Commenting on clarification, Nangia Andersen LLP Head (Government and Public Sector Advisory) Suraj Nangia said “the Government has allowed that even after change in shareholding of such ailing PSUs due to transfer of shares in such PSUs by Government to strategic investors, past losses of such PSUs will be allowed to be carried forward for set off against future profits.”

This will make disinvestment deals of ailing PSUs more attractive for strategic investors, he said.

Under normal tax provisions, he said, without this relaxation, past losses of a company are not allowed to be set off, if there is change in majority shareholding of a company (i.e. 51 per cent).

“It may be noted that such relaxation will be available, only till the strategic investor retains at least 51 per cent in the PSU after takeover. In case the strategic investor’s shareholding falls below 51 per cent, such relaxation will be withdrawn,” he added.

The ambitious divestment pipeline also includes loss making national carrier Air India for which the deadline for submission of financial bids is September 15.

The government will be selling budget airline Air India Express and Air India’s 50 per cent stake in Air India SATS Airport Services Private Limited (AISATS) besides offloading its entire stake in loss-making Air India.

The deadline for submission of Expressions of Interest (EoI) or preliminary bids was extended five times earlier before closing it in December last year.

Finance Act, 2021 has amended section 72A of the Income-tax Act, 1961 that deals with amalgamation of a public sector company (PSU) which ceases to be a PSU (erstwhile public sector company), as part of strategic disinvestment, with one or more company or companies and carry forward of losses in case of change in shareholding following sale by the government.

The Centre budgeted Rs 1.75 lakh crore from stake sale in public sector companies and financial institutions, including 2 PSU banks and one insurance company, in the current fiscal year.

As part of the privatisation strategy, the government aims to complete the strategic sale of Bharat Petroleum Corporation Ltd (BPCL), Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd, Pawan Hans, Air India, among others, by March 2022.

So far this financial year, Rs 8,368 crore has been mopped up through minority stake sales in PSUs and the sale of SUUTI (Specified Undertaking of the Unit Trust of India) stake in Axis Bank.



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CBDT, BFSI News, ET BFSI

Banking & Finance

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In order to make disinvestment deals of ailing state-owned firms more attractive for strategic investors, the government on Friday allowed erstwhile public sector companies to carry forward losses to be set off against future profits. The Central Board of Direct Taxes (CBDT) in a clarification said that Section 79 of the Income Tax Act shall not apply to an erstwhile public sector company which has become so as a result of strategic disinvestment.

“Accordingly, loss incurred in any previous year prior to, and including, the previous year of strategic disinvestment shall be carried forward and set off by the erstwhile public sector company,” the CBDT under the Finance Ministry said in a statement

The relaxation, it added, will cease to apply from the previous year in which the company, that was the ultimate holding company of such erstwhile public sector company immediately after completion of the strategic disinvestment, ceases to hold 51 per cent of the voting power of the erstwhile company.

Section 79 of the Income Tax Act deals with carry forward and set off of losses in case of companies.

“In order to facilitate the strategic disinvestment, it has been decided that Section 79 of the Income-tax Act, 1961, shall not apply to an erstwhile public sector company which has become so as a result of strategic disinvestment,” it said.

Necessary legislative amendments for the above decision shall be proposed in due course of time, the statement said.

Commenting on clarification, Nangia Andersen LLP Head (Government and Public Sector Advisory) Suraj Nangia said “the Government has allowed that even after change in shareholding of such ailing PSUs due to transfer of shares in such PSUs by Government to strategic investors, past losses of such PSUs will be allowed to be carried forward for set off against future profits.”

This will make disinvestment deals of ailing PSUs more attractive for strategic investors, he said.

Under normal tax provisions, he said, without this relaxation, past losses of a company are not allowed to be set off, if there is change in majority shareholding of a company (i.e. 51 per cent).

“It may be noted that such relaxation will be available, only till the strategic investor retains at least 51 per cent in the PSU after takeover. In case the strategic investor’s shareholding falls below 51 per cent, such relaxation will be withdrawn,” he added.

The ambitious divestment pipeline also includes loss making national carrier Air India for which the deadline for submission of financial bids is September 15.

The government will be selling budget airline Air India Express and Air India’s 50 per cent stake in Air India SATS Airport Services Private Limited (AISATS) besides offloading its entire stake in loss-making Air India.

The deadline for submission of Expressions of Interest (EoI) or preliminary bids was extended five times earlier before closing it in December last year.

Finance Act, 2021 has amended section 72A of the Income-tax Act, 1961 that deals with amalgamation of a public sector company (PSU) which ceases to be a PSU (erstwhile public sector company), as part of strategic disinvestment, with one or more company or companies and carry forward of losses in case of change in shareholding following sale by the government.

The Centre budgeted Rs 1.75 lakh crore from stake sale in public sector companies and financial institutions, including 2 PSU banks and one insurance company, in the current fiscal year.

As part of the privatisation strategy, the government aims to complete the strategic sale of Bharat Petroleum Corporation Ltd (BPCL), Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd, Pawan Hans, Air India, among others, by March 2022.

So far this financial year, Rs 8,368 crore has been mopped up through minority stake sales in PSUs and the sale of SUUTI (Specified Undertaking of the Unit Trust of India) stake in Axis Bank.



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Bank branches closed for next 4 days; SBI, other PSU banks may get hit as unions strike on March 15-16

Personal Finance

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About 10 lakh bank employees and officers of the banks will participate in this two-day strike

Bank branches may remain closed for the next four days, including a two-day weekend holiday, and a two-day planned strike beginning Monday. The United Forum of Bank Unions (UFBU), an umbrella body of nine unions, will go on a two-day strike on March 15 and 16, 2021, to protest against the proposed privatisation of two state-owned banks. Starting tomorrow, banks are scheduled to be closed on March 13, 2021 (second Saturday) and March 14, 2021 (Sunday). Due to this, bank services are likely to be impacted for the next four days. However, ATM, mobile and internet banking will remain functional. Customers are advised to plan bank-related work accordingly today, in order to avoid any last-minute trouble.

Finance Minister Nirmala Sitharaman in her Union Budget 2021 speech announced the privatisation of two public sector banks (PSBs) as part of a disinvestment plan to generate Rs 1.75 lakh crore. In 2019, the government has already privatised IDBI Bank by selling its majority stake to LIC. Moreover, so far in the last four years, the government has merged 14 public sector banks. Conciliation meetings – before the Additional Chief Labour Commissioner on March 4, 9 and 10 – did not yield any positive result, PTI quoted All India Bank Employees Association (AIBEA) general secretary C H Venkatachalam as saying.

10 lakh employees to participate in strike

About 10 lakh bank employees and officers of the banks will participate in this two-day strike. Along with AIBEA the bank unions of All India Bank Officers’ Confederation (AIBOC), National Confederation of Bank Employees (NCBE), All India Bank Officers Association (AIBOA) and Bank Employees Confederation of India (BEFI), National Bank Employees Federation (INBEF), Indian National Bank Officers Congress (INBOC), National Organisation of Bank Workers (NOBW) and National Organisation of Bank Officers (NOBO), among others have given a call for a strike.

Work in SBI may be impacted

State Bank of India (SBI) has made all arrangements to ensure normal functioning in its branches and offices. However, in a BSE filing, SBI has informed that work in the bank may be impacted by the strike. “We have been advised by the lndian Banks Association (lBA) that United Forum of Bank Unions (UFBU) which comprises 9 major Unions….has given a call for all-lndia strike by Bank Employees on 15th & 16th March 2021,” it said in an exchange filing.

Canara Bank: Bank branches functioning may be hit

Earlier this month, Canara Bank also said that it has been informed by the Indian Banks’ Association (IBA) that the United Forum of Bank Unions (UFBU) has given a call for strike in the banking industry on 15 March and 16 March for the issues relating to industry level and not for any bank-level issues. It assured that the Bank has taken necessary steps for the smooth functioning of Bank’s branches/offices on the days of proposed strike. “However, in the event of strike materializing, the functioning of the branches/offices may be impacted,” it added.

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LIC holds the key in Govt’s IDBI Bank stake sale

Banking & Finance

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Will the Life Insurance Corporation of India (LIC) sell a portion of its shares in IDBI Bank, just so that the Government can complete strategic disinvestment of its stake in the Bank in FY22?

Left to its own devices, the Corporation may not want to do it.

Reason: the current market price of IDBI Bank is much lower than the price LIC paid in FY2019 to up its stake in the Bank from 10.82 per cent to 51 per cent.

Also read: LIC to sell stake in IDBI Bank to ease process of disinvestment

LIC hiked its stake in IDBI Bank in FY2019 in three tranches — at ₹61.73 per share via preferential allotment in October 2018 and ₹60.73 per share via preferential allotment in December 2018 as well as in January 2019. IDBI Bank’s shares closed at ₹36.30 apiece on BSE last Friday.

In the last 14 months or so, IDBI Bank’s market price has been lower than the price LIC paid to increase its stake in the Bank.

The state-owned life insurance behemoth invested a whopping ₹21,624 crore (of policy holders’ money) for hiking its shareholding in the Bank. So, it will definitely want a good return on this investment.

Being a public financial institution, the Corporation’s investments are under the scrutiny of lawmakers. If a sale happens below the acquisition price, it will be frowned upon by the stakeholders.

As at December-end 2020, LIC and the Government held 49.24 per cent and 45.48 per cent stake, respectively, in IDBI Bank.

Controlling stake

The Government is planning to completely divest its stake in IDBI Bank to a strategic investor. But the investor may want to hold more than 51 per cent stake (higher than LIC’s stake) in the Bank. So, the only way this can happen is if the Corporation sells a portion of its stake to the investor.

Among the synergies IDBI Bank has achieved with LIC include premium collection (which gives the Bank float money), sale of insurance products (fetches fee income), appointment of LICHFL-Financial Service Ltd (LICHFL-FSL) as corporate direct selling agent for sourcing of MSME and agriculture loans and select structured retail assets (auto, personal & education Loan).

Given that IDBI Bank is reaping the benefit of its synergy with LIC, the new investor may want to continue this mutual synergy which has created a single window for customers to avail banking and insurance services.

Wiggle room

LIC may get wiggle room to pare its stake in IDBI Bank once the Bank complies with the profitability criteria (Return on Assets/RoA) to come out of Prompt Corrective Action (PCA). The Reserve Bank of India invoked PCA against IDBI Bank in 2017 in view of high non-performing assets and negative return on assets.

Under PCA, a bank’s branch expansion is restricted and lending is narrowed to relatively less risky segments to nurse it back to health.

Also read: IDBI Bank back in black, posts ₹378-cr net profit in Q3

The Corporation may be banking on a re-rating of the Bank’s stock, once the PCA tag is withdrawn, to support the Government’s strategic disinvestment in IDBI Bank.

In a way, LIC is treading on eggshells vis-a-vis its investment in IDBI Bank.

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LIC to sell stake in IDBI Bank to ease process of disinvestment

Banking & Finance

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Life Insurance Corporation of India (LIC) has agreed to shed its shareholding in IDBI Bank, a move which will give a boost to the government to completely exit from the IDBI Bank and also ease the process of its strategic disinvestment.

However, it is for LIC to decide on the quantum of stake it would like to part with to aid this process.

As on December 30, 2020, LIC holds 49.24 per cent of stake in LIC while 45.48 per cent is with the Central Government.

A senior official told BusinessLine that LIC is ready to sell shares. The government intends to complete the process in FY21-22. Keeping that in mind, amendments have been proposed in the Finance Bill 2021. The Finance Bill will be taken up for consideration and passage during second leg of the Budget Session, starting Monday.

LIC was brought in when IDBI Bank was in trouble, but now the government thinks that phase is over. Accordingly, they now want LIC to offload its holding. Initially, LIC was hesitant, as it believed that the government had to ask the insurance major to sell stakes.

Special relaxation

Clauses 152, 153, of the Finance Bill seek to amend the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003. Once amendments are approved, The Industrial Development Bank of India Limited shall be deemed to have obtained a (Banking) license under Section 22 of Banking Regulation Act, which will be a condition precedent to disinvestment of government’s stake in the Bank resulting in receipts to government.

In an interview to BusinessLine, Financial Services Secretary Debashish Panda had said, “as a board-run organisation, LIC has its own principles to decide about investment and sale. Whatever they do, they will do it in the interest of policy holders. So, when they are going to off load their stake, it is in their realm … I think LIC would also sense that while government is also disinvesting, it also has a mandate from the insurance regulator to bring down its holding in IDBI Bank to 15 per cent over a period of time. Now, if the government is disinvesting, this means a sizeable, strategic chunk will be available to a potential investor. It could be an attractive proposition and may fetch a better price.”

LIC taking over IDBI was made possible on account of special relaxation provided by the insurance regulator, The Insurance Regulatory and Development Authority of India (IRDAI). The regulations restrict insurer’s holding at 15 per cent stake in a single firm. Also, an insurer cannot have ownership in any non-insurance company. The Reserve Bank of India does not allow non-banking entities to have more than 10 per cent stake in a bank.

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Govt could raise up to ₹12,800 cr if it divests in 2 PSBs: CARE Ratings

Banking & Finance

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The government could raise between ₹6,400 crore and ₹12,800 crore if it cuts its stake to 51 per cent in two of the four public sector banks (PSBs) — Indian Overseas Bank (IOB), Bank of Maharashtra (BoM), Bank of India (BoI) and Central Bank of India (CBoI) — said to be candidates for disinvestment, according to CARE Ratings.

As per an equity matrix — based on average price (one-year average daily), paid-up capital, number of shares and government ownership — drawn up by the credit rating agency, IOB has the highest equity capital (₹16,437 crore), while BoI has the highest market price (₹44.75 per share) relative to the others.

Also read: PSBs consolidation: It is credit negative if govt divests stake in left out banks, says ICRA

Based on the aforementioned banks’ market prices — BoI (₹44.75 per share/ government stake: 89.1 per cent) and IOB (₹9.88/ 95.8 per cent), if the government were to lower its stake to 51 per cent, which would still leave majority ownership of these banks in the government’s hands, then the amount that could be raised from these two banks would be around ₹12,800 crore, as per CARE’s assessment.

BoM (₹11.85 per share/ government stake: 92.5 per cent) and CBoI (₹14.85/ 92.4 per cent) would garner around ₹6,400 crore, it added.

But if the government were to divest fully from these two banks, the amount that could be raised would be around ₹28,600 crore, the agency said.

In her Budget speech on February 1, 2021, Union Finance Minister Nirmala Sitharaman said: “Other than IDBI Bank, we propose to take up the privatisation of two public sector banks and one general insurance company in the year 2021-22.

“This would require legislative amendments and I propose to introduce the amendments in this Session itself.”

In 2021-22, the government would also bring the initial public offer of Life Insurance Corporation of India, she added. For this also, the government will bring in the requisite amendments in this Session itself.

The government has estimated ₹1.75-lakh crore as receipts from disinvestment in FY2021-22.

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Two PSBs, one insurance firm to be privatised

Banking & Finance

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The government is planning to set the ball rolling on privatisation of two public sector banks (PSBs) and a general insurance company in 2021-22.

It also plans to infuse ₹20,000 crore into PSBs to further augment their financial capacity.

“Other than IDBI Bank, we propose to take up the privatisation of two Public Sector Banks and one General Insurance company in the year 2021-22,” said Finance Minister Nirmala Sitharaman in her 2021-22 Union Budget speech.

The Minister said privatisation of the aforementioned entities would require legislative amendments and she proposes to introduce the amendments in this (Budget) Session itself.

IPO of LIC

In 2021-22, the government will also bring the initial public offer (IPO) of the Life Insurance Corporation of India (LIC). For this move, too, the government will bring the requisite amendments in this session itself.

Currently, there are 12 public sector banks (PSBs) and 4 public sector general insurance companies.

In her 2020-21 Union Budget speech, Sitharaman had proposed to sell the balance holding of the government in IDBI Bank to private, retail and institutional investors through the stock exchange. The government and LIC currently hold 45.48 per cent and 49.24 per cent stake, respectively, in IDBI Bank.

Rajkiran Rai G, Chairman, Indian Banks’ Association (IBA), said: “Recapitalisation of Public Sector Banks to the tune of ₹20,000 crore will help the banks to shore up the capital and provides additional room for lending.

“Proposals for the privatisation of two public sector banks and an insurance company are bold reform measures announced in the budget.”

A bold move

Banking expert Hari Hara Mishra observed that the announcement on privatisation of two PSBs is a bold move on financial reforms. It will enhance competitiveness in the banking sector and improve efficiency.

“This will reduce pressure on the government to fund growth capital for these banks. The timing of the move could not have been better as BSE Sensex is near all-time high,” said Mishra.

Banking, insurance and financial services are among the four areas considered strategic by the government. Per the policy features of the “Disinvestment/Strategic Disinvestment Policy”, in strategic sectors, there will be bare minimum presence of the public sector enterprises (PSEs). The remaining Central PSEs in the strategic sector will be privatised or merged or subsidiarized with other CPSEs or closed.

In non-strategic sectors, CPSEs will be privatised, otherwise shall be closed.

Capital infusion so far

Per the Budget document, ₹80,000 crore in 2017-18, ₹1,06,000 crore in 2018-19 and ₹65,443 crore in 2019-20 was infused for the recapitalisation of PSBs.

Further, a provision of ₹20,000 crore was made in 2020-21 for recapitalisation of PSBs.

In the FY 2020-21 so far, ₹5,500 crore has been infused by the government as fresh capital in PSBs through non-interest bearing special securities.

The government has also infused capital through issue of bonds in three other financial intermediaries – IDBI Bank (₹4,557 crore), EXIM Bank (₹5,050 crore) and IIFCL (₹5,297.60 crore).

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