 "PSU Divestment: Chidambaram has enough reasons to be worried")
Finance Minister P Chidambaram would be a worried man.He has been travelling around the world trying to convince investors to put their money in India either through the FDI route or the market route. He has made a number of announcements to back his claim that his government is now on the fast lane as far reforms are concerned. Unfortunately he has not been convincing enough.
Rather than FDI money coming in the country, those who had committed funds earlier are now withdrawing their projects. ArcelorMittal has decided to withdraw their $12 billion project in Odisha, a day after Posco decided to back out of their $6 billion project in Karnataka. Both have blamed inordinate delays by the government as the reason behind their cancellation. However, their current financial position and the slowdown in global economy could have also prompted them to review their decision.
What is more damning is the fact that FIIs have told the government,according to Economic Times, that they would not be keen on investing in its divestment issues. Finance Minister while presenting the budget had taken credit for bringing in Rs 40,000 crore through divestment during the year. A fall in rupee and a poor performance of stocks in which divestments had taken place last year is cited to be the main reason for their disapproval.
This raises an important question that if FIIs are not willing to invest in public sector companies which were being sold at a deep discount to market prices, why would they invest in Indian equity market. In order to attract investors to subscribe to the issues, government had been pricing the divestment at a discount to the market prices. Despite this, most of the issues had to be bailed out by government's savior, LIC. Stocks falling below their offer price make the lot not only unattractive for FIIs but also Indian investors.
Reason for not investing on grounds of a falling rupee is also valid for other companies in the stock market. A falling rupee eats into the gains that the stocks manage to post. Further a slowing economy has affected not only public sector stocks but most of the other ones listed in the market. Few stocks which are relatively defensive and depend on markets outside the country have shown strong numbers. But FIIs are already heavily invested in these stocks. They now account for a record 43.4% of publicly held shares, a level never seen in the history of Indian markets.
Divestment offers an opportunity for big investors to buy a big chunk of shares at one price. However, these stocks are relatively illiquid thus limiting the ability to exit. Except for the ‘long-only-funds’, most of the other investors consider liquidity or ease of exit as a key parameter before making their investment.
The fact of the matter is few public sector companies are investment worthy. Most of the public sector companies have lost their charm, thanks to poor management, bad environment and a visible bias towards private and foreign players. What the government considers as its family silver has lost its value in the market. And the government is partly responsible for it.