The disinvestment drive of the NDA government kicked off on December 5 with an offer for sale (OFS) in public sector behemoth Steel Authority of India (SAIL). The stake sale of 5% in SAIL through one-day offer was over-subscribed by more than two times. The retail participation was overwhelming, accounting for 2.6 times over-subscription.

The Life Insurance Corporation (LIC) acquired over 72% of the 20.65 crore shares in the SAIL auction, representing over 3% stake.  The SAIL OFS concluded to fetch over Rs 1,700 crore for the government. So far, so good.

However, in keeping with past divestments, the issue saw limited participation from private and foreign institutional investors (FIIs). And this time too, government-owned financial institutions played a major role. LIC has often supported the government during disinvestment process when few private investors are willing to come forward. This time also it was a typical ‘one arm buying from the other’ scenario. That has led to questions being raised about the first disinvestment offering by the Narendra Modi government.

Do private investors have a weak appetite for PSU stocks?

How does the lack of FII interest in a maharatna company reflect on the talk of ‘India story’ being stronger under the new government?

While the idea behind disinvestment is to make PSUs more autonomous and reduce the government’s influence, does this kind of stake sale really solve the purpose of disinvestment?

Industry experts have an explanation. Of those who Governance Now spoke to, most believe disinvestment has multiple objectives. And that the government, while it has certain advantages, is also precariously placed in some aspects. S Ranganathan, research head at Mumbai-based LKP Securities, says the purpose was to get the government’s holding down to 75% (in compliance with the May 2014 ruling of the Securities and Exchange Board of India, or Sebi, for all listed PSUs to cut down the government’s shareholding to 75% in three years) and this has been achieved. He adds that LIC held stake in SAIL even before December 5, and it could scale it up legally.

“FIIs are not much interested in investing in PSUs, maybe because they feel they (PSUs) are not aggressive enough in their decision making. But that does not mean the government should not go ahead with its disinvestment plans. It has been a successful disinvestment.” Ranganathan, however, agrees that the main aim of disinvestment is much more than just generating revenue.

A former CMD of SAIL, who did not wish to be named, says from a broader perspective it will prove to be a good strategy. “The real appetite (for SAIL OFS) was not generated. The moment government announces to divest its share in a public sector company, buyers shy away. But LIC is investing in SAIL, buying majority of its share, which it would sell off later,” he says.

According to various newspaper reports, LIC has been trimming its holdings in several blue-chip companies, which it had acquired during earlier disinvestments, to participate in the current disinvestment process.

Sangita Choure, joint secretary at the department of disinvestment, clarifies that the government had no role in LIC participating in the bidding process. She says LIC has an independent board which takes such decisions.

“They have been investing in PSU stocks irrespective of whether the government asks them or not, because they have faith in it. LIC sets aside a huge budget for this (PSU disinvestment),” Choure told Governance Now.

Impact on valuations
PSU stocks have lagged behind in performance even when the overall market saw a rise of over 15% since the NDA assumed power. The public sector index has seen a decline of over 2% in its value.

Also, the share price of SAIL alone has registered a decline by over 10% in the last six months. The SAIL offer on December 5 was at the floor price of Rs 83, which was below the closing of Rs 85.35 a day before.

Experts point out that unless PSU shares are priced attractively and the government offers meaningful discounts, the stake sales might not see too many (private) buyers. “The pricing was very tight,” says the former SAIL CMD, adding that a 5% discount (which was offered by the government) for retail buyers might not have been enough to prompt them to bid. However, he feels that a sharp dip in the valuations before the issue is a normal cycle of demand and supply. “When potential buyers know that there will be an increase in supply of PSU stocks when the government sells its stakes, the price goes down. And the investors don’t have enough appetite to buy them,” he explains.

He questions the government’s strategy of announcing disinvestment plans months in advance and giving time to the market to beat down the price.

Pranav Haldea, managing director at Prime Database, which compiles data on capital markets and related issues, echoes his sentiments. He says the lack of interest in the PSU sale is not the sole reason for fall in prices. “Had it been announced in such a manner that the market did not get the opportunity to beat down the price, it could have resulted in a far higher return.” He adds: “It (the government) delayed the disinvestment process because it looked at maximisation as the main objective. But you can never time the market.”

Haldea says that the government could be more cautious especially, in case of the OFS route, wherein it has the option of making the announcement after the market hours and launching it the very next day.

“This will ensure that the price doesn’t get affected. Market is very smart and they know that if the share prices come down, the government would be left with no other option but to sell it at a lower price.”

So, why doesn’t the government play safe?

There are logistical challenges attached to it, says Haldea. “The government has to do things in a very transparent way. There can be different implications of not disclosing it at an adequate time about a particular OFS. There can be allegations about favouring a particular party,” he says.

SAIL was only the first among the companies which have to be divested in order to raise funds to meet the disinvestment target (Rs 58,425 crore) for the current fiscal. Other issues in the pipeline include 10% stake sale in Coal India Limited (CIL) and 5% stake sale in Oil and Natural Gas Corporation (ONGC). Through these two big issues the government hopes to raise over Rs 40,000 crore.

Experts believe it would not be that challenging in the case of both these companies.

The former SAIL CMD says sectors such as coal and oil are important for the energy sector and thus investors see them as a good deal. Also, both the companies have unparalleled assets. “Even without the help from LIC, ONGC and CIL are expected to find significant investor interest.”

The story appeared in December 16-31, 2014, issue