With a big chunk of the Hindustan Copper Limited (HCL) issueestimated at around 30-40%having been picked up by Life Insurance Corporation (LIC), the disinvestment has once again been rescued by the PSU insurance major. Perhaps thats something the government anticipated the need for when it decided to hike individual company limits for LIC to 30% despite the insurance regulator opposing thisunder IRDA rules, insurance companies cannot hold more than 10% of the equity of individual companies. Though the finance minister has said he was happy the issue had been oversubscribedthe minimum float was 3.7 crore shares as compared to the bid for 5.2 crore sharesthe government has got just R808 crore of the R1,375 crore it would have got had the issue been fully subscribed at the floor price of R155. The fact that FIIs, the biggest players in the stock market, have largely stayed away from the issue is an indication of how little interest there was in it. And not surprisingly since, thanks to its small free float (0.41%), the share price has little connect with the companys fundamentals. Despite the companys copper cathode production falling and equipment and other production problems, the companys 12-month trailing PE is a whopping 61at the 42% discount, this is still 44 times.
The good thing, of course, is that the government has finally accepted issues need to be properly discounted if they are to be sold. At least two planned disinvestments were put on hold with the merchant banker-advised price below, in some cases, even the book value. Senior ministers have opposed selling shares of PSUs under their charge at such prices, arguing speciously that it could invite the ire of the CVC or even the CAG. This lesson is important since, if issues are not hugely discounted, LIC may end up bailing out all future issues. While LIC wrote out a cheque of R4,000 crore when NTPC was being disinvested in February 2010, in March it bought 40 crore of 43 crore of ONGCs shares being offered for disinvestmentwhile it bought the shares at R304, ONGCs stock has stayed below that level since then. Though LIC buying more shares of public sector enterprises being disinvested will help the crisis-struck budget, insurance-holders of LICs policies may have a thing or two to say about thiseven if you dont look at issues like ONGC where LIC is out of money, over the last decade, the NSEs PSU index has tripled while the overall Nifty grew 7 times. That is, LICs policy-holders are paying a price for the support LIC is giving in insuring the disinvestment process.