Awaiting the divestment trigger

Written by Jigar Pathak | Updated: Aug 30 2008, 03:57am hrs
With the Left parties no longer a hindrance to the governments divestment plans, the stock market is awaiting the next big move on the public issues of state-run companies. The challenging conditions in the Indian economy and the bearish stock market are awaiting a much-needed trigger for revival.

Uncertainty over valuation and apprehensions over response to issues could be playing on the minds of the authorities. Experts believe divestment will provide an impetus to the primary markets that are riddled by fund-raising failures by companies in the recent past. Optimistic about a revival of the primary market in the event of public issues of public sector undertakings (PSUs), Prithvi Haldea of Prime Database said, With proper valuations, the issues will get adequate response. Historically, such IPOs are known to be modestly priced. This is the best time for PSUs to raise money and give a boost to investor sentiment. It will provide relief to investors who have seen severe erosion in wealth during the first day of listing in the recent past.

Garima Kumar, director, Lotus Knowledge Wealth, is apprehensive of a full revival of the primary markets. The current divestment of PSUs is very relevant for the primary market as historically, PSU IPOs have been modestly priced and investor gains could rekindle some interest. But by themselves, state-run company IPOs wont be able to revive the primary market entirely. A revival in the primary markets will depend on several factors including global ones and transcends beyond just PSU disinvestment. However, right pricing and right timing of IPOs have seen primary markets gather momentum in the past. A successful IPO could certainly add a favourable momentum to the market sentiment, Kumar adds.

In the past, Rural Electrification Corporation Ltd (RECL), a public financial institution providing funds to power infrastructure companies, which tapped the capital market early this year, provided the much-needed antidote to investors amid bad IPO market conditions after the Reliance Power fiasco and was oversubscribed by around 28 times. The government holding in the company came down from 100% to 81.82%.

Around 47 PSUs are listed on the stock exchanges and have managed to outperform many bluechips. The BSE PSU index has given a negative return of around 2% while the Sensex has lost more than 3% in a years time. The UPA government, headed by Manmohan Singh, has raised Rs 8,500 crore in the last four years through disinvestments. It divested Rs 2,760 crore in FY05, Rs 1,569 crore in FY06 and Rs 4,181 crore in FY08. There are around 156 profit-making PSUs among the total of 217. Out of this, 16 are Navaratnas (highly profitable) and 54 mini-ratnas.

Explains Haldea, The value unlocking that the PSUs bring, not only to the public but also to the government, is enormous. The public money is flowing back to the public with lots of value-addition. Its not through privatisation but through selling only modest 5-15% stakes. After the divestment, the companies go through the rigour of compliance to the stock exchanges and better scrutiny of the management and hence better accountability to public money.

The widely-debated strategic sale method of disinvestment, which was undertaken by the National Democratic Alliance (NDA) government, saw around Rs 28,000 crore being raised through this route. In 2003-04, its last year in power, the NDA raised Rs 15,547 crore through disinvestments, which is nearly double the funds raised by the UPA in four years.

To avoid any allegations of wrongdoing, the most transparent method of divestment is clearly by way of a public issue of shares, explains an investment banker. Apart from apprehensions about market conditions, other procedural issues such as the adequate listing requirement with regard to Clause 49 are also issues to consider ahead of listing PSUs. The listing agreement requires independent directors to account for at least half of a companys board strength if the board is headed by an executive chairman. For boards headed by non-executive chairmen, independent directors need to comprise a third of the board.

The government has finalised professionals for appointment as independent directors to the boards of some companies which will take some time to be implemented, implying some delay in the state-owned companies hitting the market.

Also to be factored in is opposition to divestment in PSUs from labour unions as in the case of telecom giant BSNLs proposed IPO.

But the government badly needs to look at the divestment option to offset its fiscal deficit position and other mounting costs in the form of pay revisions. The next few months will, therefore, be decisive on this front.