* Decision seen helping government to raise cash
* India likely to miss $8.1 bln divestment target for 2011/12 (Adds details, analyst comments, background)
NEW DELHI, March 1 (Reuters) - India has allowed cash-rich state companies to buy back shares and participate in the government's divestment programme, a minister said on Thursday, as New Delhi looks to narrow its widening fiscal deficit.
Two dozen of India's largest public sector companies, including Coal India, power utility NTPC, miner NMDC, Steel Authority of India and oil producer ONGC, hold cash reserves of 1.8 trillion rupees ($36.6 billion), media reports have said.
Any cash returned through share buybacks would help the government, the biggest shareholder in these companies, while investment in share sales of other state-run firms would help the faltering divestment plan.
"It seems fiscal management is right on top of the government's mind," said Jagannadham Thunuguntla, head of research at SMC Global Securities.
"They are looking at all modes possible to reach their 400 billion rupees target -- if not this year, then early next year."
On Thursday, the Cabinet Committee on Economic Affairs approved the buyback proposal and allowed cash-rich state firms to bid in the divestment programme.
"It all depends on companies, it is just an enabling provision," Praful Patel, minister of heavy industries, told reporters.
New Delhi is widely expected to miss its deficit target of 4.6 percent of GDP for the fiscal year ending March, in part due to the government's inability to raise its target of 400 billion rupees ($8.1) billion through state-company share sales.
So far this fiscal year, the government has only raised about $250 million. It is expected to raise another $2.5 billion by selling 5 percent stake in Oil and Natural Gas Corp in a share auction on Thursday.
Analysts said the government needs to cut its holding in several firms and is likely to encourage share sales in these.
Under current regulations, listed companies are required to have minimum public shareholding of 10 percent, but at least eight state firms, including Hindustan Copper, HMT , MMTC Ltd and State Trading Corp currently don't comply with these rules, analysts said.
Other cash-rich companies, such as Coal India or NTPC or SAIL, whose cash reserves are far beyond their expansion or acquisition plans, may consider investing in share sales in other public sector companies.
"If the companies have surplus cash they can go for this option," a government source said adding: "The final decision would be taken by the company boards." ($1=49.2 rupees) (Reporting by Manoj Kumar and Prashant Mehra; Editing by Ranjit Gangadharan)