Sell SUUTI holdings to retail investors

Updated: Feb 5 2014, 10:07am hrs
In my previous article (Distorting divestment, FE, January 31, http://goo.gl/XnFxNm), the several curious, ingenious ways the government is inventing to meet the disinvestment target were examined. These included sale to state undertakings, buybacks, cross holdings, special dividends and ETF. The good news, though, has been that the government is finally planning to encash the shares held by SUUTI, though only partly, and that the stake sale in Hindustan Zinc and BALCO may finally materialise.

Disinvestment to a common man, as also to all who had made the policy, has for long meant diluting a small part of the government holding in PSUs by way of a capital market offering. The stated objective, on one hand, has been to broaden and deepen the capital market and, on the other, bring about more transparency and better corporate governance in PSUs that come subsequent to listing. That is the only way the government should move forward for divestments.

Specifically with reference to the SUUTIs stake in three companiesfull sale of all shares in Axis Bank, ITC and L&T, which together can rake in a huge R50,000 croreshould be pursued. For this, selling to FIIs should not be even on the radar. In the case of Axis, for example, FIIs are already holding 45% of the bank, and there is no justification to allow them to hold higher stake, though the government has already provided a felicitation clause by allowing FIIs to go up from 49% to 62%. FIIs are not bringing any strategic value to the bank, they are pure financial investors. We continuously moan the hijacking of the Indian capital market by FIIs, and we also moan the lack of retail investors in our market. Here is the opportunity to make good.

The total stake held by SUUTI in all three companies, and for that matter in all listed PSUs, should be entirely sold to the retail investors. This is the best ever opportunity to get retail household savings into the market, with many first time investors also likely to join in. All these are blue-chip companies and retail would lap these up a sure-shot way of reviving the interest of the retail investors in the capital market. A good discount of 10% on the market price should be offered to them, and to prevent flipping, a one-month lock-in could be stipulated.

In fact, the focus should only be retail for all divestments. That is also what the manifestos of all political parties had declared. For example, the Congress manifesto had stated that every Indian has a right to own shares in PSUs. Even the Vision Statement of the Department of Disinvestment proclaims promote peoples ownership of PSUs through disinvestment while adding on, its Mission Statement emphasises increase public shareholding in the listed ones and develop and deepen the capital market through spread of equity culture.

A retail policy will also have a major positive impact. It will provide the much-needed depth and width to our capital market. Household savings of millions of retail investors brought to the capital market shall help grow the much-needed equity cult. It will also address the grave scarcity of good listed companies which causes excessive speculation and volatility.

Such pricing for retail shall surely not maximise returns for the government. But we should recognise that in this manner, it is the public wealth in the public sector undertakings, which in any case belongs to the public, which shall be shared rightfully only with the public. Significantly, such discounted offerings to retail would be criticism-free as allotments shall be made to anonymous, and not selected, investors. At the same time, it would bring in millions of small investors into equity investing. It would, of course, also be politically expedient.

Vested interests representing FIIs often create fear about the lack of depth of the domestic retail investors. This is a bogey. Just two examples would suffice: 46.23 lakh retail investors put in R39,919 crore in the IPO of Reliance Power and 15.61 lakh retail investors put in R10,232 crore in the IPO of Coal India. And these were man-on-the-street investors, who put in applications of less than R1 lakh each, and were genuine investors, sans the multiple applications, following the strict enforcement/regulations post the IPO scam.

If all-retail offers are not acceptable, the next best alternative for these three companies as also for all other listed companies would be to sell only to the domestic institutional investors through a closed auction (except for ITC, where the government can do a strategic sale to BAT at a very hefty premium). It is well known that there are many long-term investors who would like to acquire large quantities of these stocks and hence would be willing to pay even a premium to the market price (and not discount as is likely to happen) as any bulk purchase from the market is cumbersome and leads to big spikes in the prices. The present practice of advance announcements, which typically leads to beating down of the prices, and the open auction route at a discount to the market price should be abandoned.

In the case of IPOs, 25% of the issue should be sold to QIBs though book-building to help price discovery. The balance 75% should be offered to the retail at a discount of 10-15% on the discovered price through the fixed price route.

On a long-term basis, to reduce ministerial interference and to be able to plan and execute divestments effectively, an idea worth pursuing is to transfer all shareholding of the government to a professionally-managed holding company, who would take appropriate decisions on share sales. Of interest would be to know that the present market value of government holdings in 45 listed central-government owned enterprises is about R7.8 lakh crore and that of 26 public sector banks another R1.8 lakh crore, both aggregating R9.6 lakh crore. Add to this the value of government holding in unlisted companies.

This is the best time, as ever, for the government to divest aggressively. People have been devoid of any capital market opportunity for nearly three years now. PSU issues can actually be the instrument for reviving the sentiments. Which all plans will mature in the current fiscal would be interesting to watch. But of greater interest would be the drawing up of a long-term divestment strategy, which would focus on the capital market, on the retail investors, and on better management of PSUs.

The author is chairman of PRIME Database