The much-awaited divestment ‘drive’ finally started off last week, though in a small way, with R1,715 crore worth of SAIL shares. While there have been reports of its ‘flying colours’ success, the offer, in fact, has brought to the fore several critical questions. It not only failed to attract any marquee global investors but also did not generate enough interest in retail (collecting only R172 crore from retail). Ironically, a small private sector IPO—Monte Carlo Fashions—at the same time collected as much as R850 crore from retail. And, as ever, LIC and some other government institutions had to come to its rescue, taking up over 70% of the offer.

This year, the divestment target is an ambitious R58,425 crore; last year, the achievement was only R21,321 crore against the target of R54,000 crore. With more than two-thirds of the year already gone, a minuscule R1,800 crore has been raised. This is worrisome—there would be an undesirable crowding of issues in the last quarter. It is only hoped that given the pressures, the government does not resort to the ingenious ways of last year—special dividends, cross holdings, buybacks et al.

The objective of disinvestment should not just be raising funds to meet fiscal deficit, it should be broadening and deepening the capital market and getting retail investors, and to bring more transparency and better governance in PSUs.

Besides opposition from ministries and trade unions, deterrents of divestments include policies and procedures. For example, as the government, in the name of transparency, announces its intentions of specific share sale of listed companies much in advance, the market starts selling, including short selling and arbitrage, beating down the prices of such stocks, resulting either in deferral of offers or the government having to sell the shares at much lower prices. There have been many such cases. Take PowerGrid. Its 52-week-high price was R121, and subsequent to the advance announcement of the FPO, the market beat down the price, and its issue had to be priced only at R90. For 18.52 crore shares that were divested, the loss to the government was a whopping R574 crore. No one can be held accountable for such losses, the defence being that the offer could have been done only at the prevailing market price. Recently, despite the rising Sensex, prices of ONGC, Coal India and NHPC have fallen.

Even SAIL fell from its 52-week high of R112 to R89.3 on November 28 to R82.8 on the offer day; resulting in a floor price of R83.
We moan the hijacking of Indian capital market by FIIs. We also moan the lack of retail investors in our market. Yet we have resorted to OFS and other institutional mechanisms. The OFS route is efficient. It has, however, not been able to obtain the best prices. And it has completely ignored retail. Now, a 10% reservation has been made for retail in OFS (this is no favour to retail; the reservation is 35% in IPOs/FPOs). Fortunately, Sebi has provided for a cut-off option for retail. But given its complications and not being friendly to first-time investors, the OFS route may not attract many small investors.

The focus should be on retail. That is what the manifestos of all political parties had declared. Even the Vision Statement of the Department of Disinvestment proclaims “promote people’s ownership of PSUs through disinvestment”. Its Mission Statement emphasises “increase public shareholding in the listed ones and develop and deepen the capital market through spread of equity culture.”
Thatcher style, all issues from listed PSUs and PSBs should be sold entirely to retail. This is the best opportunity to get retail household savings into the market, with many first-time investors also joining in. All these are blue chip companies and retail would lap these up. The simplest form of offering—fixed price FPOs—should be made.
Important, however, is pricing. A good discount of 10-15% on the market price should be offered. The current 5% discount has evaporated in a matter of days given the volatility of our markets. To prevent flipping, a suitable lock-in could be stipulated.

The government should not look at maximising receipts, which in any case it has not been able to. Such discounted pricing for retail shall surely not maximise returns for the government. But we should recognise that, in this manner, it is the public wealth which is being shared rightfully with the public. Such discounted offerings would be criticism-free as allotments shall be made to anonymous, not selected, small investors. It would also bring in millions of small investors into equity investing. This would also be politically expedient. It has been intriguing why the last government was not keen on giving discounts to anonymous small investors but gave ONGC and Oil India a hefty 10% discount to buy government’s 10% stake in Indian Oil!

A retail policy will have other positive impacts. Retail investors would get a taste of equity. It will provide the much-needed depth and width to our market. It will address the grave scarcity of good listed companies, which causes excessive speculation and volatility. Finally, it would bring down our over-dependence on FIIs.

Vested interests often create fear about the lack of depth of 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.

These were man-on-the-street investors, who put in applications of less than R1 lakh each, and were genuine investors, sans multiple applications, following the strict enforcement/regulations post the IPO scam.

Let the all-retail policy at least be tested. Any one good PSU can be offered through fixed price FPO at a 15% discount. The retail depth will be clearly demonstrated.

To enthuse retail further, RGESS should be reoriented to cover only IPOs, PSU divestments and mutual funds. To increase reach, since banks are computerised, all their branches should become collection centres.

Until the time we get down to 100% retail offerings, at the least, the current systems need to be changed. In OFS, large reservations should be made for domestic institutional investors and retail. The name of the company and its offer price should be announced with only a one-day notice, and the trading in the relevant company’s shares should be put in suspension mode on the day of the offer. Most PSUs are very actively traded and well-researched and neither any advance notice is necessary nor road-shows to promote such sales.

If FIIs are to be involved, they should be offered only the closed auction method. It is known that some of these are long-term investors who would like to acquire large quantities of these stocks and hence would be willing to pay even a premium on 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 prices.

On the IPO front, little is being talked about. The last PSU IPO was the small R125 crore from NBCC in March 2012, which incidentally has given a five-fold return. The only IPO in the pipeline is of Rashtriya Ispat Nigam. More IPOs should be planned. In all IPOs, 25% of the issue should be sold to QIBs though book-building to help price discovery. The balance 75% should be offered to retail through the fixed price route at a discount of 10-15% on the discovered price. Retail customers of respective banks should be preferred for the proposed sale of PSU banks’ shares.

On a long-term basis, to make these PSUs more valuable, there is a need not only to bring greater clarity to sectoral policies that affect PSUs, but also improve on corporate governance. Also, disinvestments have become a victim of lack of leadership and opposition. To expedite these, an idea worth pursuing is to transfer all shareholding of the government to a professionally-managed holding company, which would take appropriate decisions on share sales.

On another front, as I have been advocating, the government seems to have a plan to exit from loss-making CPSEs (there are nearly 80 of these with collective cumulative losses of R60,000 crore). It should exit from such businesses where the government should no longer be involved.
The markets are upbeat, but can take a downturn any time. Bad pricing/bad processes may lead to issues being called off or be tactfully placed with government institutions. Stake sales through OFS cannot revive the primary market; IPOs and retail FPOs can. 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 game-changers.

The author is founder-chairman of PRIME Database Group