Nov. 6 (Bloomberg) -- India’s plan to limit stakes in state-run companies and sell new shares of profitable unlisted companies may help the government mobilize more revenue and reduce its dependence on borrowings, economists said.

India’s cabinet yesterday approved a plan requiring all state-run companies to make sure that 10 percent of shares are publicly traded and said proceeds from share sales should be used for spending on social programs such as creating jobs and building roads, ports and utilities.

The index of 48 state-run companies on the Bombay Stock Exchange climbed 3.8 percent today, its biggest gain in four months, as the government re-energizes its share-sale plan to benefit from a 70 percent gain in India’s benchmark stock index this year. Prime Minister Manmohan Singh had to put on hold his asset-sales proposals during his first term after opposition from his communist allies.

“The move will definitely put a substantial amount of money in the hands of the government and to that extent help it finance its huge spending requirements,” said Sonal Varma, a Mumbai-based economist at Nomura Securities Co., Japan’s largest brokerage. “It will help the government borrow less from the markets” and ease pressure on the bond yields, she added.

Benchmark 10-year bond yields have climbed 2 percentage points this year, the most since at least 1999, as government debt sales increased. The yield, which rose to an eight-month high of 7.47 percent in September, will increase to as much as 7.5 percent this year, HSBC Holdings Plc predicts.

Budget Spending

Morgan Stanley estimates the market capitalization of state-run companies at about $425 billion and has said share sales of $50 billion in the next three years could help the government reduce its budget deficit by 4 percentage points.

Finance Minister Pranab Mukherjee on July 6 unveiled record borrowing plans to fund budget spending aimed at boosting an economy predicted by the central bank to expand 6 percent in the year through March, the slowest since 2003.

The government’s plan to make sure that 10 percent of state-run companies are publicly traded may see it selling stakes in companies where the government’s holding is more than 90 percent.

Some of the firms where the government’s holding is more than 90 percent include MMTC Ltd., India’s biggest state-owned trading company, NMDC Ltd., the country’s largest iron-ore producer, Neyveli Lignite Corp., a miner and power producer, and National Fertilizers Ltd., a state-run fertilizer-maker.

Shares Gain

The government owns 98.38 percent in NMDC, 99.33 percent in MMTC and 91.02 percent in State Trading, according to filings to the Bombay Stock Exchange.

MMTC surged 15 percent to 34,650 rupees as of 11:33 a.m. in Mumbai. State Trading soared 13 percent to 348.65 rupees. NMDC, the largest iron-ore producer, rose 10 percent to 338 rupees. Hindustan Copper Ltd., India’s largest copper miner, 99.59 percent state-owned, gained 10 percent to 256.35 rupees. Rashtriya Chemicals & Fertilizers Ltd., 92.5 percent government- owned, advanced 13 percent.

The government may get as much as 280 billion rupees ($5.98 billion) by selling stakes in 12 state-run companies, the Economic Times reported, citing its own calculations. India may earn 600 billion rupees in total from share sales, it said.

The government didn’t provide any timeframe or schedule of share sale.

‘Big Positive’

The government so far has raised about 42 billion rupees since April 1 by selling shares in NHPC Ltd. and Oil India Ltd. State-run NTPC Ltd. and Rural Electrification Corp. also plan to sell shares this year.

“I think, this is definitely a big positive for the markets,” said Nomura’s Varma. The rule change allowing disinvestment proceeds will give the government much-required funds to meet its expenditure needs, she said.

Till now, rules required proceeds from asset sales to be credited to the National Investment Fund and only three-fourths of the fund’s income is used to finance education, health and employment programs. The remaining 25 percent is used to meet the capital investment needs of state-run companies, according to the government.

The benchmark stock index rose more than 1 percent today on optimism that government share sales will curb a deficit estimated to widen to a 16-year high of 6.8 percent in 12 months to March.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

Last Updated: November 6, 2009 02:34 EST