A Rs 40,000 crore challenge

Divestment: To revive interest in PSU shares the govt may offer many sops

A Rs 40,000 crore challenge

While presenting the Union budget at the end of February 2010, Finance Minister Pranab Mukherji has set a huge target of raising Rs 40,000 crore during the current fiscal year (2010-11) by selling shares of profitable government-owned companies.

By hawking shares of public sector undertakings (PSU), Mukherji wants to bridge the gap between the government’s expenditure and revenue collection in 2010-11. And the choice of divestment –– an alternate source of revenue –– comes in the wake of government’s revenue from taxes and other sources failing to cope with its burgeoning expenses. But the big question is, will the government succeed in raising the target amount? Another uncomfortable poser: should the government-owned financial institutions and banks be used to bail out PSU disinvestment?

Take the case of two large PSU share issues that hit the market in February and March 2010. In both the cases, insurance giant LIC and some PSU banks had to chip-in huge sums of money to make them sail through. Putting it in perspective, it looks like a person (govt) taking money from one pocket to fill another.

Having decided to sell PSU shares, the Centre, in the previous financial year (2009-10), had come out with several large issues of shares. The issue of NMDC was the biggest as it raised Rs 9,930 crore. The other big issues were Rs 8,480 crore from NTPC, Rs 2,247 crore from OIL, Rs 2,012 crore from NHPC and Rs 882 crore raised by REC. Surprisingly, even as these PSU’s are highly profitable and are dominant players in their respective fields, investors showed little interest in them and the issues could barely scrape through with minimum subscriptions.

Why this apathy?

The subscription for the retail portion, for example, was a pathetic one-fourth of the allotted amount. Poor response from retail and institutional investors had forced LIC and some PSU banks to buy shares of these PSU companies in a big way. Cash rich LIC was made to invest close to Rs 12,000 crore to rescue these issues. Analysis shows that there are several reasons why investors shied away from PSU share issues. High issue price is one of them. In case of NMDC, for example, the price band for the follow-on issue in the first week of March 2010 was fixed at Rs 300-350 per share. Going by NMDC’s share price of Rs 556 in January 2010, the issue price looked attractive, but in realty, it was not.

Since the government held 98.38 per cent of NMDC’s equity, the floating stock of the company’s share at 1.62 per cent of the equity was extremely low. Hoping to buy the company’s share at a lower price, shareholders started offloading existing holding and, thanks to low floating stock, NMDC’s share price crashed to about Rs 350 around the time the issue was to open.

Since the market price dropped close to the issue price, investors avoided the FPO fearing further drop in prices. In case of issues from NTPC and REC too, investors preferred to stay away for similar reasons. The other reasons for lackluster response are: poor marketing efforts, lack of hype usually seen with mega issues and unclear picture of the future prospects of these companies.

Lessons learnt

Technically, although the sale of PSU shares can be termed as ‘successful’ with the government raising Rs 23,552 crore in 2009-10 altogether, only 6 per cent lower than its last year’s target of Rs 25,000 crore, general lack of interest was a big dampener for the future PSU disinvestment plans. It is not that the market was bad in 2009-10. The stock indices gained steadily throughout the year and as many as 44 companies, including state-run companies, came out with public offers and follow on offers during fiscal 2009-10, when the main stock indices gave a whopping return of over 80 per cent, to raise funds over Rs 47,800 crore.

The government surely has reasons to worry. As the stakes are high –– the disinvestment target of Rs 40,000 crore in 2010-11 is almost double the amount raised last year –– officials in the finance ministry are already working on various plans to generate interest in PSU shares.

In the process of listing issues, pricing is key and also tricky. Firstly, abrupt change in the overall market sentiment can throw all pricing calculations out of the window. If priced too high, shares won’t sell, if priced low, there will be good demand but issue managers will be accused of selling government’s jewels for cheap.

Knowing these shortcomings, officials in the disinvestment department are planning to offer PSU shares at attractive discounts to market price. For they say that making money is not the first priority of stake sale, adding that investors’ participation is the prime need.

Taking this forward, there is also a move to offer a discount to retail investors between 5 per cent to 10 per cent of the issue price on a case-to-case basis. The idea is to broad-base post-issue shareholding by roping in large number of retail investors. Wider public holding, rather than a few large investors cornering bulk of the sold shares, also sounds politically correct.  Other initiatives on the agend include high-decibel marketing activities and making investors aware of the strength of PSUs. Had the issue campaign of NMDC, for example, highlighted that the company’s near monopoly position in metal ore production, the future perception of the company could have been better, experts pointed out.

Further, the Centre has made it mandatory for all PSUs to adopt the tenets of corporate  governance in a bid to put the divestment process on fast track, as also making them more investor friendly, which will result in higher share sale. PSUs will now follow disclosure and accounting norms as part of corporate governance introduced on a voluntary basis in 2007.

As for divestment in the current year some big names like Hindustan Copper, Coal India, Bharat Sanchar Nigam Ltd (BSNL), Steel Authority of India Ltd (SAIL), Engineers India, Satlij Jal Vidyut Nigam, etc., feature in the list.

Not for fund raising

Meanwhile, the disinvestment process, which had come to a virtual halt till the last financial year due to resistance from the Left parties, may now pick up speed as the government has been formed without support from the Left this time around.

The Congress party has also successfully convinced its allies in the UPA government that PSU disinvestment is not like selling family jewels for meeting household expenses.
Mukherjee has said that money from sale of PSU shares will not come under general income of the government. Part of it will be kept in National Investment Fund, a special fund created for modernising weak PSU’s and for rehabilitating workers who have lost their jobs due to closures of sick PSUs. And a part of the money will also be spent on capital expenditure in the social sector and employment guarantee schemes.


Spread it out

With the government making it clear that its objective is not maximising valuation but to offer retail investors opportunities to participate in the future gains of a PSU, issues should be evenly spread over the financial year to avoid crowding-out effect. Also, there is no need to time the market for selling PSU shares at the most opportune moment to get the highest price because in a volatile Indian stock markets it is difficult to time the market.

Investors must be told to take a long term view. Endorsing this view, Prithvi Haldea, Chairman and Managing Director of Delhi-based Prime Database, pointed out in an article that in case of four large PSU disinvestments in the last five years, the combined market valuation went up nearly three times.

Benefits to PSUs

Furthermore, companies selling shares will also benefit by listing their shares. As they will have to disclose data on physical and financial performance every quarter, management will be on their toes. All major price-sensitive developments in the company will also be made public through announcements to stock exchanges. Every move of the company and its financial results will be constantly monitored and scrutinised by the media, investors, analysts and stock brokers and which in turn will force the management to perform.

Currently, although unlisted PSUs do prepare balance sheets, it is an annual affair and financial reports are not available for public scrutiny. So, listing of PSUs will make management decisions much more transparent and managers will be made more accountable.

By making PSUs more efficient the government too will benefit as PSUs will depend less on government financial support. The icing on the cake is that with stronger balance sheets the government will be able to raise more money from subsequent sale of PSU shares.

However, mere disinvestment will not make PSUs more efficient. The government will have to entrust the job of running these companies to professional managers and give them complete managerial freedom.

It may retain 51 per cent or more stake in profitable PSUs to technically maintain majority ownership, but it should stop interfering with the management. It should also desist from taking populist policy decisions that could be harmful for some PSUs.

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