Management Aptitude Test Dec 2012 Paper

Passage III

The change in the Government's focus, from coveting the cash balances of Public Sector Undertakings (PSUs) to examining how these can be put to better are use by them, is a welcome development. In the current investment-starved environment, there is certainly a strong macro-economic imperative for inducing PSUs to deploy funds in capex programmes. But from a share holder’s perspective and that applies to the Government as well-it is also important that funds in excess of their immediate investment needs, estimated at over ₹ 1 lakh crore, earn a reasonable return. This is made difficult by rigid and archaic investment norms. So, it is a double whammy, wherein idle money of state-owned firms neither gets invested in projects nor generates sufficient portfolio returns. The current guidelines on deployment of surplus cash by PSUs decrease that 60% of these should be parked with public sector banks. The ‘public sector' mutual funds requirement is outdated, when many of them-promoted by the likes of UTI,SBI and LIC have roped in foreign partners, making these ventures little different from pure private sector fund houses. Now that the investment guidelines are to be reviewed by a Government committee, it may be best for the Government to just stipulate general prudential norms to be followed by PSUs. These norms could emphasise safety and liquidity of investments, their diversification across asset classes and securities and provisions against taking speculative bets that expose shareholder funds to capital loss risks.