India’s largest fuel retailer is undertaking its biggest share buyback since 2001 in order to help the central government meet its disinvestment target

(Image source- Reuters)

• The board of the state-owned Indian Oil Corporation (IOC) has approved a plan to buy back a little over 3% of its total equity shares.
  
• The fuel retailer will spend around ₹44.4 billion on the buyback plan, culminating in its largest buyback in 17 years.
  
• The move also includes a dividend payout of ₹6,75 per share, resulting in a total payout of ₹65.6 billion.
  
• This will result in a huge cash infusion for IOC’s shareholders, especially the central government, which holds a 54% stake in the oil firm.
  

On 13 December, the state-owned Indian Oil Corporation (IOC) announced in a stock exchange filing that its board had approved a plan to buy back a little over 3% of its total equity shares. India’s largest fuel retailer will spend around ₹44.4 billion on the buyback plan, culminating in its biggest buyback in 17 years.

The move also includes a dividend payout of ₹6,75 per share, resulting in a total payout of ₹65.6 billion. It will result in a huge cash infusion for IOC’s shareholders, especially the central government, which holds a 54% stake in the oil firm.

However, it could add unnecessary strain to IOC’s finances. At the end of September 2018, it had total debts of around ₹600 billion, compared with a paltry cash balance. It remains to be seen how exactly it will fund the transaction, but it will likely incur a lot more debt. This, coupled with its high capital expenditure plans in the medium term, could leave it a rather unviable position.

The impetus behind the transaction is to help the government, acting through the the Department of Investment and Public Asset Management (DIPAM), meet its disinvestment target of ₹800 billion for fiscal 2019. It has reportedly collected 68% of that amount so far this year.

The DIPAM is reportedly planning to earn as much as ₹50 billion from share buyback programmes of large state-owned enterprises energy firms like Coal India and Bharat Heavy Electricals, according to the Press Trust of India. As per a government order, all public sector enterprises with a cash balance of over ₹10 billion have to undertake share buybacks.

Last week, the government also decided to sell a 52.63% stake in infrastructure financier Rural Electrification Corp (REC) to another state-run power lender, Power Finance Corporation (PFC). However, just like IOC, the issue of debt could be a problem here. PFC will have to raise a significant amount of debt to finance the purchase, a tough ask for a firm weighted down by ₹283 billion worth of gross non-performing loans.

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