 "Govt tweaks stake sale plan to keep bears at bay")
Stung by a series of setbacks in the past few years, the Union finance ministry is planning a whole new approach to disinvestment from the next financial year. It starts with a multi-year rolling disinvestment list, instead of a yearly stake-sale road map, and seeks to compress the time taken in regulatory processes to ensure that the bears do not bring down the share prices.
The biggest challenge the department of disinvestment in the finance ministry has faced is that once the disinvestment of any company becomes public knowledge, either after the Cabinet approval or once the request for proposal (RFPs) for merchant bankers is issued, investors sell shares in the hope to restock at lower prices later and book profits in the process. Under the current circumstances, they get three to four months, or even more, to bring down the prices because that is how long it takes the government to select the merchant bankers, conduct roadshows, get regulatory nods, and hit the market.
For example, the share prices of the four biggest public sector undertakings that were on the disinvestment list for 2014-15, Coal India, ONGC, SAIL, and NHPC, were Rs 420, Rs 464, Rs 110, and Rs 28, respectively, in early June, their highest for the year, on the back of the Narendra Modi-inspired bull run. Around that time, the news of these companies being shortlisted for disinvestment became public. By early October, Coal India was down to its one-year low of Rs 334, while SAIL hit its one-year low of Rs 67 in late September. Both ONGC and NHPC hit their one-year lows of Rs 335 and Rs 18, respectively, in mid-December. This even as the broader market and the benchmark BSE Sensex continued the rise. This 20-40 per cent fall had thrown the finance ministry's divestment calculations out of gear. It also runs a political risk: opponents could accuse it of playing into the hands of a bear cartel and selling the family silver cheap.
Quicker and faster
The intention may be fine, but can the go-to-market time be compressed? The department of disinvestment thinks it can be done. As the first step, it will take a blanket approval from the Cabinet, which will include companies whose stake sale may be more than a year away. While yearly targets for disinvestment will be set in the budget as usual, the department of disinvestment will pick and choose from the companies on its rolling list to meet the target, based on market conditions and the ease of regulatory approvals.
The aim, according to officials, is to give bears as little time to react as possible. However, in today's world of flash trading when large volumes of shares can be offloaded in a matter of seconds, won't a month give bears enough time to hammer down a stock? If a large institutional investor or a group or retail investors want to drive stock prices down, they can do so in a matter of days and weeks. "While reducing the time taken on regulatory clearances for a stake sale is a good move, if it is being done with the intention of giving bear investors less time to react, then it won't work," says Santanu Syam, executive director of operations at Angel Broking. "The approval process should not be reduced with that objective. It will be a difficult thing to achieve."
Derailed plans
But this problem which threatens to derail disinvestment needs to be resolved. Thanks to the sharp drop in the share prices of public-sector units, the department of disinvestment this year had to delay its stake-sale road map from September to December. So far, only SAIL has been divested and while selling stake in three other big companies, NHPC, Coal India, and ONGC, will be enough for the Centre to meet its disinvestment target for the year, there is still uncertainty on some smaller companies shortlisted for this year, including Rural Electrification Corporation, Power Finance Corporation, and MOIL.
The new rolling list will include almost all PSUs, including those in which the government's stake needs to be brought down to 75 per cent within the next two and a half years, as mandated by the Securities and Exchange Board of India (Sebi) in June 2014. At current prices, the government can rake in close to Rs 60,000 crore if it brings down its stake to 75 per cent in about 20 listed PSUs. Some of the big public sector companies in which the government holds more than 75 per cent include Coal India, Nalco, NHPC, NMDC, ITDC, MMTC and National Fertilizers.
For 2014-15, the government had budgeted to raise about Rs 36,000 crore from stake sale in ten PSUs, at least Rs 15,000 crore from the sale of its residual stake in Hindustan Zinc and Balco (these companies are now a part of Anil Agarwal's Vedanta group), and about Rs 6,500 crore from selling part of the Rs 56,000 crore combined stake it holds in Axis Bank, Larsen & Toubro, and ITC through Specified Undertaking of UTI (SUUTI). The planned residual stake sale in Hindustan Zinc and Balco has been scrapped for this fiscal at least owing to legal complications and the delay in valuations of the stake held by the Centre in the two entities. Also, the planned exchange-traded fund through which the finance ministry was planning to sell the SUUTI entities is also on the back burner for now.
The mid-year economic analysis has stated that tax revenues could fall short by as much as Rs 105,000 crore. The only way Finance Minister Arun Jaitley can meet the strict fiscal deficit target of 4.1 per cent of GDP for the year is by heavily cutting spending and ensuring that disinvestment, spectrum sales and PSU dividend exceed the budgeted targets. With just one quarter left, for disinvestment at least that looks difficult.
The biggest challenge the department of disinvestment in the finance ministry has faced is that once the disinvestment of any company becomes public knowledge, either after the Cabinet approval or once the request for proposal (RFPs) for merchant bankers is issued, investors sell shares in the hope to restock at lower prices later and book profits in the process. Under the current circumstances, they get three to four months, or even more, to bring down the prices because that is how long it takes the government to select the merchant bankers, conduct roadshows, get regulatory nods, and hit the market.
For example, the share prices of the four biggest public sector undertakings that were on the disinvestment list for 2014-15, Coal India, ONGC, SAIL, and NHPC, were Rs 420, Rs 464, Rs 110, and Rs 28, respectively, in early June, their highest for the year, on the back of the Narendra Modi-inspired bull run. Around that time, the news of these companies being shortlisted for disinvestment became public. By early October, Coal India was down to its one-year low of Rs 334, while SAIL hit its one-year low of Rs 67 in late September. Both ONGC and NHPC hit their one-year lows of Rs 335 and Rs 18, respectively, in mid-December. This even as the broader market and the benchmark BSE Sensex continued the rise. This 20-40 per cent fall had thrown the finance ministry's divestment calculations out of gear. It also runs a political risk: opponents could accuse it of playing into the hands of a bear cartel and selling the family silver cheap.
Quicker and faster
The intention may be fine, but can the go-to-market time be compressed? The department of disinvestment thinks it can be done. As the first step, it will take a blanket approval from the Cabinet, which will include companies whose stake sale may be more than a year away. While yearly targets for disinvestment will be set in the budget as usual, the department of disinvestment will pick and choose from the companies on its rolling list to meet the target, based on market conditions and the ease of regulatory approvals.
The aim, according to officials, is to give bears as little time to react as possible. However, in today's world of flash trading when large volumes of shares can be offloaded in a matter of seconds, won't a month give bears enough time to hammer down a stock? If a large institutional investor or a group or retail investors want to drive stock prices down, they can do so in a matter of days and weeks. "While reducing the time taken on regulatory clearances for a stake sale is a good move, if it is being done with the intention of giving bear investors less time to react, then it won't work," says Santanu Syam, executive director of operations at Angel Broking. "The approval process should not be reduced with that objective. It will be a difficult thing to achieve."
Derailed plans
But this problem which threatens to derail disinvestment needs to be resolved. Thanks to the sharp drop in the share prices of public-sector units, the department of disinvestment this year had to delay its stake-sale road map from September to December. So far, only SAIL has been divested and while selling stake in three other big companies, NHPC, Coal India, and ONGC, will be enough for the Centre to meet its disinvestment target for the year, there is still uncertainty on some smaller companies shortlisted for this year, including Rural Electrification Corporation, Power Finance Corporation, and MOIL.
The new rolling list will include almost all PSUs, including those in which the government's stake needs to be brought down to 75 per cent within the next two and a half years, as mandated by the Securities and Exchange Board of India (Sebi) in June 2014. At current prices, the government can rake in close to Rs 60,000 crore if it brings down its stake to 75 per cent in about 20 listed PSUs. Some of the big public sector companies in which the government holds more than 75 per cent include Coal India, Nalco, NHPC, NMDC, ITDC, MMTC and National Fertilizers.
For 2014-15, the government had budgeted to raise about Rs 36,000 crore from stake sale in ten PSUs, at least Rs 15,000 crore from the sale of its residual stake in Hindustan Zinc and Balco (these companies are now a part of Anil Agarwal's Vedanta group), and about Rs 6,500 crore from selling part of the Rs 56,000 crore combined stake it holds in Axis Bank, Larsen & Toubro, and ITC through Specified Undertaking of UTI (SUUTI). The planned residual stake sale in Hindustan Zinc and Balco has been scrapped for this fiscal at least owing to legal complications and the delay in valuations of the stake held by the Centre in the two entities. Also, the planned exchange-traded fund through which the finance ministry was planning to sell the SUUTI entities is also on the back burner for now.
The mid-year economic analysis has stated that tax revenues could fall short by as much as Rs 105,000 crore. The only way Finance Minister Arun Jaitley can meet the strict fiscal deficit target of 4.1 per cent of GDP for the year is by heavily cutting spending and ensuring that disinvestment, spectrum sales and PSU dividend exceed the budgeted targets. With just one quarter left, for disinvestment at least that looks difficult.