India plans to set tough financial targets for state-run firms to try to improve their valuations ahead of a push by Prime Minister Narendra Modi to privatise some companies, according to a draft government document and officials.
The government, which is trying to rein in its fiscal deficit, wants state-run firms to focus on improving market capitalisation and dividend payouts from the 2021/22 fiscal year, starting April, as well as ramping up the sale of non-core assets, the officials said. State-run companies have traditionally largely targeted raising output and increasing revenues, rather than improving efficiency and valuations, contributing to years of share price underperformance vs broader market.
“The companies need to raise their valuation and profitability in a changing business environment. Then only we will be able to get a better price (from stake sales). Shareholders and investors should be rewarded,” said a government official with knowledge of the plan.
After regaining power in 2019, Modi’s government prepared a plan to raise as much as ₹3.25 lakh crore over five years by selling down its stakes in companies including Oil and Natural Gas Corp. Ltd, Indian Oil Corp. Ltd, NMDC Ltd, Coal India Ltd, Bharat Heavy Electricals Ltd and BEML Ltd.
It announced moves to privatise companies in non-strategic parts of the economy and reduce the number of firms in key sectors. The Centre has already initiated steps to privatise Bharat Petroleum, Container Corp. and Shipping Corp.
However, weak investor sentiment and limited demand have led to delays. So far this fiscal year to end-March 2021, the government has raised only a tenth of its targeted ₹1.20 lakh crore stake sales. The planned changes in annual targets could be announced in next year’s federal budget, due in February, a second government official said.
“The state-run companies will need to deploy funds raised through asset monetisation for issues like debt repayment. They should have return on capital employed and return on equity quite high on the margin,” the official said.
For the first time, India will include annual targets for state-run companies on metrics such as earnings before interest, tax, depreciation and amortisation, according to officials and a document on the draft guidelines, which is currently before a government committee.
Other targets will include increasing market capitalisation or share price, as well as measures such as return on net worth and capital employed, they said. For unlisted companies an uptick in earnings per share will be a key parameter instead of market capitalisation, the document showed.
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