The Indian government's decision to kick-start the contentious disinvestment of public sector undertakings through the initial public offering route comes as major boost to the capital market.

Experts say the offloading of a part of the government's equity in blue-chip state-run companies by floating public issues would attract a large number of overseas funds as well as domestic retail investors to the share market.

With the ruling United Progressive Alliance (UPA) approving the divestment of 10 percent stake in the engineering firm Bharat Heavy Electricals (BHEL), many more such proposals are likely to follow, they say.

"The coalition government's decision to revive the stalled disinvestment programme despite the opposition from some of its allies comes as a major boost to the market," said Ambareesh Baliga, vice president of Karvy Stock Broking.

"Firstly, it sends out a clear signal that reforms are firmly on track and that disinvestment of public sector companies hasn't been abandoned despite pulls and pressures from different quarters," Baliga told IANS.

"Secondly and most importantly, the offloading of government stake in the capital market will help draw a large number of retail investors. There is a great appetite for quality issues in the market."

The government Thursday cleared the proposal diluting 10 percent of its stake in BHEL. This is the second stake sale in a public sector unit by the UPA, which completed one year in office last week.

In October last year, the initial public offering of state-run National Thermal Power Corporation (NTPC) - one of the leading players in the country's power sector - was floated. The issue had received massive investors' response.

Analysts say the successful completion of the BHEL issue would enthuse the government to tap the public offering route for the divestment of other public sector firms in the months ahead as the stock market index soars higher.

"It's quite clear that this government will not go for strategic sale of public sector companies and the divestment will mainly happen through the public offering route," said Deepak Shah, a senior analyst with Pranav Securities.

"There are at least half a dozen companies in which the government may dilute its stake by floating public issues. This will trigger a massive rush of investors towards the Indian capital market," he added.       

Other leading state-run firms that are likely to tap the market for divestment of stake include Power Grid, Shipping Corporation, Engineers India, and Power Finance Corp.

Unlisted companies like domestic aviation major Indian Airlines and national flag carrier Air-India are also gearing up to tap the stock market to raise resources to compete with the more resourceful private companies.
 
While the government generated over Rs.40 billion through diluting its stake in the public sector companies in the last financial year, no targets have been fixed for the current year.