5 reasons why Modi govt may miss FY15 disinvestment target

Despite better investment appetite, the govt may find it difficult to raise Rs 43,000 crore through stake sales in FY15

The Narendra Modi-led central government has an uphill task ahead of it — achieving the target of raising Rs 43,000 crore in 2014-15 through sale of stake in public-sector undertakings. Of that, it has so far managed to raise only Rs 1,700 crore, by divesting a 5% stake in Steel Authority of India (SAIL). Success of big-ticket stake sales in Coal India and Oil and Natural Gas Corporation (ONGC), estimated to raise about Rs 20,000 crore and Rs 15,000 crore, respectively, are critical to meeting the target. The Business Standard lists out five reasons why the government might not be able to meet the target:

LIC may run out of investing capacity
It is no secret that participation of public-sector financial institutions, led by Life Insurance Corporation (LIC), will be important in the Coal India and ONGC stake sales. In 2011-12, LIC had invested around Rs 12,000 crore in picking up nearly 95 per cent of shares on offer in ONGC, the largest offering of that year’s disinvestment programme. This time, LIC might have to sign even bigger cheques, twice. But LIC’s investment capabilities this time as premium collections are yet to gain traction this year. Although LIC has booked profits of more than Rs 10,000 crore this year thanks to the market rally, industry officials say that it will be difficult for the insurance giant to mop up bulk of Coal India and ONGC shares on offer if such a need arises.

ONGC’s realisations, union worries at Coal India
Though the investor appetite has seen a sharp improvement this year, there might be concerns over investing in ONGC, an upstream oil company, at a time when crude oil prices have declined sharply. The stock has already taken a beating on account of this. In the case of Coal India, the Centre might struggle to fend off resistance from trade unions. Given a paucity of time, the union issues could prove a significant hurdle. Also, the stock is already ruling close to the 12-month target price set by analysts.

Biggest share sales ever
The government plans to divest a 10 per cent stake in Coal India. That, at current prices, should fetch around Rs 23,000 crore. The Indian capital market has never seen such a large offering. The country’s largest share sale to date is Coal India’s Rs 15,000-crore IPO in October 2010. Not only will the government have to top this record, it will have to do so almost twice over — in both Coal India and ONGC stake sales. This will be the first time the market will be tested with such huge offerings in quick succession.

Tapering foreign flows
Flows from global investors, especially sovereign wealth funds (SWFs), is critical for any large share-sale offering. Most SWFs belong to oil-producing countries, whose investment capabilities have taken a hit with oil prices nearly halved. We have already seen foreign institutional investors (FIIs) pull out more than Rs 3,000 crore in the last few sessions. Even the recent SAIL offering saw little FII participation. Most experts think FII flows will further dwindle after the oil price drop. Also, if the ongoing risk-off trade — which has resulted in a five per cent correction in the Indian market — does not reverse, foreign investor participation in these two large offerings will be muted.

Target never met
The government has fallen short of its disinvestment targets almost every time in the past. In the past five years, it has raised an average Rs 20,000 crore every year, half of the average Budget target of Rs 40,000 crore. It might not be inappropriate to say the Modi government was out to achieve the impossible.