Issue 23- On Share Buyback and Cloud services

In today’s Finshots brief, we will talk about

• The Indian government’s share buyback plan
• Microsoft’s push in the cloud service domain

The Government’s Buyback Gambit

The Indian government is in trouble. The virus has completely ravaged our economy. Tax collections are down. Their plan of raising over $27 billion by privatizing and selling off parts of state-owned companies like Air India and Bharat Petroleum didn’t quite work out. And so, fiscal deficit i.e. the government’s spending over income - is set to rise to double the target rate of 3.5% of GDP for 2020-21. Bottom line - The government is out of options and it needs to make some money, quick.

And it seems like they’ve figured out a way to do just that. They have asked eight state-run companies, including Coal India, Engineers India Ltd, NTPC, and NMDC, to consider buying back their shares.

Now share buybacks technically means the company repurchases its shares from public and private investors. Here, the issuing company pays shareholders the current market value of their holdings, and reabsorbs the ownership of the company that the shares indicate.

One of the most common reasons for doing something like this is to divert funds from the company back to shareholders. You see, when companies issue shares, they do it to raise capital for growing their business. And in return they expect the company to compensate them by growing leaps and bound or by repatriating profits in the form of dividends.

But what if the company doesn’t see many growth opportunities on the horizon? What if it has a lot of funds just sitting there?

Well then, in such cases, buying back shares does make sense.

So the story goes that the government had asked 23 public enterprises to ramp up capital expenditure to 1.65 lakh crores rupees this fiscal. The idea was that spending on infrastructure like roads, dams, bridges, buildings etc. would help in generating employment opportunities and reviving the economy. But as virus infections across the nation remain rampant, these companies aren’t able to meet their spending goals, and are now sitting on idle funds worth 40 thousand crores. And so, the government has asked them to either meet their targets or reward shareholders.

So if the buyback program were successful, then the government could make some money because it happens to be the biggest shareholder in these public sector companies.

However, it may not be able to tap into all companies. Because in some of these enterprises, the government holds a 51% stake - just enough to ensure it remains in control. If some of these shares are bought back, it may no longer be a majority shareholder.

Unless, of course, it side steps that rule somehow. According to an anonymous government official, they may ask the cabinet to allow them to cut their stake below 51% and still retain control of firms that have sufficient funds but low capital expenditure. But we’ll just have to wait and see how this plays out.

Microsoft Azure goes to Space

For the uninitiated- cloud computing goes far beyond storing files on the internet. Products like Microsoft Azure give companies access to a massive pool of computing resources that allow them to host their web and email servers, databases, user manuals and basically anything else they may want. It’s a huge and ever expanding industry and now, Microsoft Azure is all set to step up its game once more.

The tech giant is tying up with SpaceX’s starlink network - a constellation of small satellites scattered in low Earth orbit, which aims to bring internet access to remote areas. With this, Microsoft aims to power a new line of modular cloud-data centers in remote areas.

Why would they want a data centre in a remote location you ask?

Well, because, some businesses have restrictions. Most military establishments need their data centres on premise and since they are usually located in remote areas, Microsoft has to put its computers near these sites.

So the story goes that these data-centres can be fit into cargo aircraft and deployed in remote areas  in order to provide services for operations like mining, humanitarian missions, defence, and even urban uses.

Through this initiative, Microsoft is expected to explore more defence and military contracts. It’ll also help the tech giant compete directly with Amazon, which launched a similar space-focused initiative 3 months ago.

Signs of Recovery

Even before the coronavirus hit, India’s consumer goods makers were dealing with the worst slowdowns in a decade. And once the lockdowns started, they faced painful supply chain issues and labour shortages. But now that restrictions have eased, Hindustan Unilever has seen a rise in its quarterly profit and sales. Know more.

Job Insecurity

According to a recent survey of 12,430 people by the World Trade Organization, over half of the world’s workers are worried about losing their jobs amid the coronavirus crisis. Here’s why.

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-Written by Vedika Agarwal