The government, in this year?s budget, had announced the Rajiv Gandhi Equity Savings Scheme (RGESS). With the objective of spreading the equity cult, this aims to provide tax incentives to new small investors for investing in listed stocks with a lock-in. There have been strong arguments against this proposal as it exposes ?equity illiterate? people to individual stocks whose selection itself may be arduous and a lock-in would force investors to stay even in stocks whose fortunes are falling. The author has already suggested that this scheme should be made solely applicable to investments in mutual funds, which provide professional expertise and a reduced risk due to a diversified portfolio. On another front, the government has been struggling to effect divestments; the total mobilisation stands at zero this year against the target of R30,000 crore.
This article suggests a new way forward that will help meet both the objectives. It makes a case for divestments mainly to small investors as a means to increase the equity cult. An alternative case is made for making RGESS applicable to such investments.
An investor typically looks at the company and then the price before making an investment decision. In the context of divestments, PSU paper offers investors the ?safety of company?, given the long-standing track record and high credentials of the PSUs that are already listed or are planning to get listed. Most of these companies have been in business for decades, are profitable, and in many cases are dominant players in their respective sectors. The concerns regarding an unknown private promoter do not exist at all in the case of PSUs.
That brings us to the second aspect?the price. The government has been struggling on this front. Given the declining and volatile state of the markets, decision-making seems to have come to a standstill. Who will take the decision to sell shares of an existing listed company at a discount to the market price, or in the case of an IPO, at an offer price that is, say, lower than the book value? Worse, the government has been behaving like any greedy private promoter. It keeps telling the market that it is waiting for an ?opportune time?. It continues to state its intentions of maximising the proceeds, as one of the recent quotes shows: ?We will list PSUs as soon as the markets are in good shape. We want to gain maximum advantage of the markets.?
It is time we got out of this logjam and not only raise the funds so desperately needed to cut our growing fiscal deficit but also get more small investors and reenergise our markets.
Pricing of subsequent offerings by already listed companies presents a unique challenge. If the offer is through FPOs, the FPO offer price has to be at a significant discount to the current market price. In a volatile market, this discount may disappear over the mandatory seven days from the date of announcement of the price to the issue closing date, making the issue unsaleable. Market prices can even be suppressed by ?operators? before the FPO price announcement, forcing the government to settle for lower prices. For already listed PSUs, 100% of the offer should be reserved for the retail. The shares should be offered at a discount of 15% to the current market price.
It is absurd to have both secondary and primary markets discover the price of the same company at the same point of time. Thus, FPO intentions should be announced only one day prior to the opening date and trading in the relevant company?s shares should be suspended immediately upon this announcement and this should continue till the closing date of the FPO. Since no price is required to be ?discovered?, the market price should be used as a benchmark for the discount.
For IPOs, reservation for retail should be increased to 70% (from the current 35%). Of the balance, 10% should be reserved for schemes of Indian mutual funds dedicated to PSU stocks and 10% for the other QIBs (these offers will, of course, have the claw-back option). Since there is no benchmark price, the 20% block for the QIBs should be offered through closed auction. Once the price has been discovered, retail offerings should follow immediately at a discount of 10-15% on the discovered price. The retail offering should be done only through the fixed price route as retail investors are ill-equipped for auction/book-building.
Such a pricing of FPOs and IPOs shall surely not maximise returns for the government. But we should recognise that in this manner, public wealth will rightfully be shared 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.
Questions may be raised about the depth of the retail market. This is bogus, given the experience of the recent past. For example, the Reliance Power IPO attracted as many as 46.23 lakh retail investors who collectively put in a massive R39,919 crore as advance application money in just five days. 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.
Divestments can be integrated with RGESS. RGESS could be made applicable only to investments in PSU stocks, purchased through an IPO or an FPO (along with investment in mutual funds, as suggested earlier). For the purposes of RGESS, the definition of listed stocks can be expanded to include such companies that shall list within one month of allotment. This would enable PSU IPOs to also be eligible for investments.
There should also be a cap of R50,000 on such investments. Moreover, the scheme should not be available just to new investors (they are most equity averse) but to any individual whose annual income is less than R10 lakh. There are millions of small investors who have a demat account with zero shares or a very small number of shares, and they should not be excluded. To avoid instant profit-taking, such investments can rightfully have a lock-in, say, of one year. This lock-in would be defendable as the shares are being offered at a discount.
Investors should also be allowed to get allotments in the physical mode or through a bank depository mode. The small investor would be saved from the hassles of opening demat accounts and subsequent charges; many investors may like to hold the ?family silver? for long periods. A demat account should be mandated only for selling.
The above policies would be politically correct. What better opportunity to please millions, the aam aadmi? This approach shall also help meet the Congress manifesto promise that ?every Indian has a right to own shares in PSUs.?
Such a retail policy will also have a major positive impact. It will provide 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.
This is the best time for the government to divest aggressively. People have been devoid of any capital market opportunity for nearly two years now. PSU issues can actually be the instrument for reviving the sentiments; remember that it was a PSU divestment?Maruti in June 2003?that had earlier led to the recovery of the market.
Let the coming two years be remembered as a golden period of divestments through public offers, of having increased the market size, number of investors and trade volumes, as also bringing stability to the market, and truly spreading the equity cult in India.
The author is chairman and managing director of Prime Database