1. The great Indian sale

The great Indian sale

PSU stake sales offer retail investors a good buying opportunity. Should you bite?

By: | Updated: February 4, 2015 12:37 PM

The government is targeting to mop up R58,000 crore this financial year through divestment of its stake in certain PSUs like CIL, ONGC, NHPC, PFC, REC and CCI. The process has already been kickstarted with a 5% stake sale in SAIL. Retail investors got a discount of 5% to the bid price in the SAIL offering, the offer for sale (OFS) for which was subscribed over two times.

What is OFS?
Offer for sale (OFS) is a window provided by stock exchanges to promoters of listed firms to help them dilute holdings in a transparent manner. It is an exchange-based bidding platform. OFS is faster and more cost-effective than other routes available to a promoter. Of late, even non-promoters like financial institutions and private equity firms, having 10% stake in a company, are taking this route to off-load their holding. Shareholders of India’s top-200 companies by market capitalisation are eligible to take the OFS way to sell shares. Under OFS, a minimum of 10% of the issue size is reserved for retail investors. Retail investors are defined as those who bid with an amount less than R2 lakh.

What is FPO?
A follow-on public officer (FPO) is a process by which a company that is already listed on an exchange issues new shares to investors. FPO is used by companies to diversify their equity base. An FPO should not be confused with an IPO, which is the initial public offering of equity to the public. FPO, on the other hand, is a supplementary issue made after a company has been listed on the stock exchange.

Value for money?
Discounts: The government is likely to offer good discounts to retail investors and, to benefit from these, existing investors could sell their holdings at a higher price in the secondary market and participate in the new offerings.

Dividend: Some of the PSUs on the block are cash-rich and often distribute high cash dividends. This is primarily to help the government meet its fiscal deficit target. In this process, the dividend distribution passes on to retail investors as well. Further, the dividend yield ratio will become very lucrative if one is getting the share at a discount to the market price. With potential capital appreciation in the medium to long term, PSU stocks could offer good dividend yield.

Alternative route for risk-averse: Investors who do not want to have a direct exposure to equity can also get into PSU stocks using the dedicated PSU funds. PSU funds have generated decent returns in the past and may also do so in the near future. However, note that the discount offered to retail investors is not available on mutual funds. The government has also proposed to come out with an exchange-traded fund of shares known as Special Undertaking of the Unit Trust of India (SUUTI) holdings. However, it’s still work in progress.

When it comes to sensitive sectors, such as banking, oil and gas, investors need to exercise caution. Generally, PSU banks are burdened with significant non-performing assets. PSU oil firms are the biggest beneficiaries of the recent fall in international crude prices. The decontrol of diesel prices is another plus for them. However, the government is yet to spell out a subsidy burden sharing mechanism. While investing in the shares of disinvesting PSUs, it’s important to be selective. Go in for well-managed PSU stocks only and not before finding out more about the sector to which they belong.

The writer is associate professor of finance and accounting at IIM Shillong

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