Sebi needs to work on more liberal OFS/FPO rules
While it is still not clear whether the government actually has an ambitious ‘strategic disinvestment’ target—the R28,500 crore listed under this head in the Budget document may also include the HZL and SUUTI shares—it is good news that the government plans to approach it more systematically this time around. For one, as the disinvestment secretary has said, the plan will be to ensure the sales are not bunched together at the end of the year, but are evenly spaced out to ensure there is enough investor appetite. The government will also need to push the courts to take a decision quickly since the HZL/Balco residual stake sale is believed to be stuck due to a challenge in court. And it is still not clear why, for over two consecutive years, the government is not selling the SUUTI shares in Axis Bank, ITC and L&T—there is no possible strategic gain for the government by holding on to these shares, collectively worth R62,900 crore.
Equally important, as was seen in the case of the Coal India divestment, the government has learnt some important lessons. In the past, when the list of PSUs being divested was made public months in advance, market participants would beat down the share price in anticipation of new stock being made available. In the case of Coal India, however, the market was taken by surprise and an offer for sale (OFS) was announced two days before the sale—this is the same way private sector firms approach their OFS, and there is no reason why PSU sales should not be done in the same manner. The problem with disinvestments through the follow-on public offer (FPO) route is that it takes at least 3-4 months, sometimes a lot more to prepare the prospectus and get Sebi clearances, which is enough time to give investors the chance to beat down shares.
Fortunately, with Sebi having come out with a discussion paper on this last month, chances are the rules for OFS will be relaxed soon—right now, just around 200 companies are allowed to use the OFS route. Given that, once firms are listed, there is a continuous information flow to investors, it has in any case, never been clear why OFS rules should not be eased and why fresh prospectuses need to be prepared for FPOs. It would also be a good idea to ask Sebi to suspend trading at the time of the OFS window since it makes no sense for two price discovery places to be taking place simultaneously.