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PUBLIC sector companies, which had been allowed to invest in the equity markets through mutual funds, are now under pressure from the government to stay invested in the crumbling stock market. According to government sources, several public sector undertakings (PSUs) have been directed not to press redemptions from public sector mutual funds as it could lead to further panic in the market.

The move comes at a time when the Reserve Bank of India (RBI) has provided a Rs 20,000 crore liquidity facility to mutual funds to help them overcome redemption pressures in the wake of the financial crisis.

The government’s move comes close on the heels of power major NTPC withdrawing Rs 1,000-crore worth of investment in mutual funds fearing further market crash.

“Though there has been no formal communication, the PSUs have been directed not to exit from their investments. The government had also recently ordered PSUs not to invite competitive bids for bulk deposits and keep at least 60% of funds with public sector banks. This decision is also on the same line,” a government official said.

Being major investors in MFs (a substantial portion of Rs 2 lakh crore cash surplus with PSUs could be invested in MFs), the government feels that PSUs should remain invested in funds to counter excessive selling pressure in the market. Already, state run financial institutions have tried to balance selling pressure at the bourses by being active buyers of stock. While in the last two days FIIs have sold shares worth Rs 2,191 crore (net sales), domestic institutional investors have actually bought stocks worth Rs 1,407 crore.

The government had allowed navratna and miniratna companies to invest their cash surpluses in Sebi-regulated public sector mutual funds to enhance treasury returns. According to a Crisil study, bluechip PSUs, which include both navratnas and miniratnas, have over Rs 2 lakh crore of surplus cash, out of which 30% could be invested in public sector mutual funds.

The government permission to PSUs even included investment in equity-linked funds on the condition that such investments should not exceed 30% of the available surplus of the concerned PSU. The government relaxed the norms after various PSUs requested that allowing them to invest in the booming stock market will provide them a level playing field with the private sector in terms of investment options. Earlier, public sector companies had only exposure in fixed deposits, treasury bills and RBI bonds.

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