Govt pushes stake sales, tax reforms to cut deficit

By C.J. Kuncheria and Rajkumar Ray

NEW DELHI (Reuters) - The government on Thursday mandated more sales of shares by state-run firms and changed the rules on how it can use the proceeds, as it seeks to boost revenues and rein in a widening budget deficit.

The government also said it was looking at tax changes as it tried to cut a budget shortfall forecast to hit a 16-year of 6.8 percent of gross domestic product in 2009/10 (April/March).

Analysts said there was a risk a rush of public offerings could drain cash from the market, and raising funds by selling assets was not a durable solution to the fiscal problems.

The government said all profitable, listed state-run firms must have at least 10 percent of their shares in public hands, and unlisted firms that had a positive net worth, no accumulated losses and a net profit over the past three years should list.

The news lifted shares from their day's low to close about 1 percent higher.

"Market sentiment should be positive. Foreign institutional investors are interested in these stocks," said R.K. Gupta, managing director of Taurus Mutual Fund.

"The only worry is that liquidity might be sucked from the secondary market to the primary market. The appetite depends on the pricing. It should not be an aggressive pricing, there should be a 10-15 percent discount."

The government said the funds from the listings would be spent on social schemes for three years. Currently, proceeds are put in a National Investment Fund and only its dividends are used for funding social security schemes.