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India plans to tap free reserves of govt companies for overseas acquisitions

26th April 2013

By: Ajoy K Das

Creamer Media Correspondent

  

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KOLKATA (miningweekly.com) - The Indian government is exploring mechanisms for pooling the free cash reserves of government-owned mineral and mining companies to acquire mineral and energy assets overseas.

The new proposal followed the government’s rejection of floating a dollar-denominated $10-billion sovereign wealth fund for the same purpose, considering the mounting current account deficit (CAD) currently faced by India, senior government officials said.

India’s Planning Commission had suggested the creation of a sovereign wealth fund, as reported by Mining Weekly in August 2012, but the Department of Economic Affairs (DEA) on Wednesday rejected it on the grounds that given the country’s adverse CAD, it would not be prudent to draw on foreign exchange reserves to create such a fund, the official added.

It was pointed out by officials that Finance Minister P Chidambaram had recently urged cash-rich government companies to speed up the use of their free cash-in-bank through faster implemention of their investment plans, which would, in turn, reverse the investment gloom in the country.

Against this backdrop, the DEA had been directed to explore and frame an institutional mechanism through which these free cash reserves could be pooled for overseas minerals, including fertiliser minerals and energy asset acquisitions on commercial terms and conditions, the official said.

A preliminary list of  government-owned companies had already been drawn up, including Coal India Limited (CIL), iron-ore miner, NMDC, the country’s largest steel producer Steel Authority India Limited and oil exploration and production major ONGC Limited.

The government concluded that an investment fund corpus from surpluses of government-owned companies would be more fiscally prudent than drawing from the country’s foreign exchange (forex) reserves, as the CAD had shot up to 6.7% of gross domestic production on rising gold and oil imports on the one hand and falling exports on the other.

The Finance Ministry had set a target to bring down the CAD to 5% during 2013/14 and, therefore, could not risk using the forex kitty for foreign asset acquisition overseas, the department of economic affairs argued.

However, at the same time, officials underlined the imperative of stepping up overseas asset acquisitions in the interests of energy and raw material security, particularly when the country was facing acute shortages of coal for thermal power generation, coking coal for steel production, as well as dependency on imported oil.

The combined free cash reserves of government companies operating in energy, mineral and mining sectors was estimated at $25-billion.

The cash-richest among them, as of March 31, were CIL with $10.44-billion, ONGC with $5-billion, NMDC with $3.63-billion, power producer NTPC Limited with $3.2-billion and power equipment manufacturer Bharat Heavy Electricals Limited with $1.2-billion.

In this regard, the officials pointed out Planning Commission data which indicated that over the last two years, India’s overseas acquisitions in the mining industry were estimated at $5-billion, compared to $21-billion by China.

Edited by Esmarie Iannucci
Creamer Media Senior Deputy Editor: Australasia

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