Coping with the flood

It was an unmistakeable signal. On Thursday evening, a small knot of journalists standing outside Electronics Niketan got more than they bargained for.

Stepping briskly down the long, outdoor staircase was Intelligence Bureau chief K P Singh. He had just finished a meeting with Disinvestment Minister Arun Shourie.

What role will the Intelligence Bureau play in disinvestment? The exact details aren't necessary. What was clear was that the Government was sending a loud signal to everyone involved in the disinvestment drama "" it will go the full mile to ensure that the public sector megaissues go through smoothly.

On Thursday night came further signs that the Government was piling on the pressure in every way possible.

From North Block came whispers that the finance secretary had called in the top bosses of the public sector banks and the financial institutions and told them they might have to step in to support the issues. That came after Shourie had already talked tough to the lead managers of the issues.

Perhaps it wasn't surprising that on Friday morning, after a week of yo-yoing about, the market began to respond to the pressure. In the morning the market see-sawed but finally ended up almost 100 points up by the time it closed.

The new issues also seemed to be finally attracting investors. After starting out anaemically, they began to perk up on Thursday and Friday. By the time the IPCL issue finally closed on Friday evening it was oversubscribed.

Everyone agrees that the public sector companies coming to the market with fresh issues are blue chip offerings.

But that doesn't change the fact that the Government may have been wrong to push through so many high-value issues in such a short space of time. It has overstretched the market in more ways than one.

What went wrong? Basically, Finance Minister Jaswant Singh needed the money from disinvestment to fill his budgetary gaps. So the disinvestments had to be rushed through. And that's not an easy task with such vast exercises.

Initially, the Disinvestment Ministry had planned to hold split some of the issues and partly convert some into ADRs or GDRs so that the pressure on the domestic market wouldn't be too great.

The other alternative was to space out the issues so that each one would get the undivided attention of the investors.

In a meeting in January, between the finance and disinvestment ministries, the advice of the officials was to bring the Gail issue to the market in April. The problem was, firstly, that this would blow a hole in the budget.

Also, everyone agreed that it would be tough to approach the market while the general elections were on. Inevitably, the markets would already be unsettled at that point of time.

With such a time schedule it was always going to be tough to pull off. The result is that six companies "" ONGC, Gail, Dredging Corporation of India, IBP, IPCL and CMC "" are all hitting the market in around two weeks.

The total amount being raised: Rs 14,500 crore. Also, there are IPOs like Petronet, Bank of Maharashtra and Power Trading Corporation.

Racing against a deadline, the paper parade took off on February 20. First came IPCL and it was followed three days later by CMC.

IBP opened on Monday, it was followed by Dredging Corporation on Thursday and Gail on Friday. And even before these are wrapped up, ONGC is waiting to hit the ramp on March 5. It is currently trading at Rs 700 levels.

The Disinvestment Ministry also made other moves in order to push the issues through as fast as possible.

It obtained approval from the Cabinet Committee on Disinvestment for a move under which only financial advisors who had already been involved in earlier disinvestments would be allowed to bid.

Shourie argued that if this condition wasn't introduced it would take two months from January to appoint the financial advisors.

Inevitably, the cascade of issues has caused confusion on the markets. At a human level it has taken a toll on the merchant bankers who've been trying to sell the issues. Take the plight of S Mukherji, the newly-appointed managing director and chief executive officer of ICICI Securities.

Early in the week Mukherji was in London to sell the IBP issue for which his company is the co-lead manager. He returned quickly to Mumbai and then took off for London once again later in the week to sell the Gail issue which opened on Thursday.

For small investors too, the bunching of issues has been a problem. If they apply for an issue, their money will be stuck for two or three weeks and that, inevitably, causes difficulties.

"There is nothing in it for the small investor as he is forced to spread his reserves over five to seven issues. For him, it does not make good sense to take a market risk for three weeks, when at an 8 per cent discount, he can be in that stock and still remain liquid," says Gagan Banga, chief marketing officer of online trading site IndiaBulls.

Shourie doesn't agree. According to his statement made in the Capital, the small investor has been shortchanged in the current circus.

"We assume the small investor is doing something and we try to discover his motives. But he is not doing anything. Only a few persons are trying to pull down the market," he said.

Is the government passing the buck? Even as the minister has said that he "knows who's behind the stock crash", some like Parag Parekh, head of the eponymous securities firm criticises the government. "The government didn't understand the market forces."

The broking community believes that the bunching of issues was bound to lead to trouble. "The markets are severe on anything. And with the IPOs bunched together, there is a huge demand-supply mismatch," says Motilal Oswal, chairman & managing director of Motilal Oswal Securities. He also claims that small investors misjudged the current IPO wave.

According to him, they expected an encore what happened last May with highly successful issues like Maruti Udyog, Indraprastha Gas and TV Today.

For instance, the enthusiastic response of retail investors to the Maruti issue last June kicked off the recent bull run. With an offer price of Rs 125, Maruti touched Rs 165 on listing and is now driving at Rs 500 levels.

With a Rs 45 offer price, Indraprastha Gas listed at Rs 119.20 on December 26 and is down to Rs 89.95 now.

And media magnate Aroon Purie's TV Today Network, with an offer price of Rs 95, hit the bourses at Rs 181.35 and closed Thursday at Rs 144.10. These issues were a windfall for investors who booked profits immediately on their listing.

"Since they made money on the above issues, investors borrowed heavily from the market now. But this time, the IPOs were coming out in a depressed market," says Oswal.

The contrast was evident when the Rs 450 crore Patni Computer Systems came on the market. Despite the fact that it was oversubscribed by 22 times it closed the first day at just Rs 2 over its issue price. Small investors who had borrowed heavily to invest in the stock may have lost money on it.

Also, the bunching has left investors with no time to roll their money. Small investors generally borrow money to invest in paper. They then offload it after making a killing on its listing, and the money is then invested in some more issues.

"Now, with the surfeit of paper in one go, they are forced to recede from the secondary market to remain liquid," says Indiabull's Banga.

This pulling out of the secondary market, saw the Sensex plunge 417 points in just a week. The Government also kept the biggest "" ONGC "" for last.

Otherwise, it feared people would bid for ONGC and ignore all the other issues. "By reversing the strategy it expected investors to buy other issues and still remain liquid for ONGC," says a broker.

Has that happened? It is a bit too early to predict. "Instead of putting all my eggs into ONGC, I am now spreading my Rs 1 lakh corpus over other oil companies as well. I am disappointed," says Rajan Bishnoi, a bank employee.

In such a situation, wouldn't the government have been better off doing private placements of its assets? "It couldn't have. It had to be seen as distributing ownership. In that sense, this is not divestment, it is only a minority ownership transfer," feels Banga.

So, in a temperamental market, can the government still pull off its disinvestment programme? "Definitely. The market is at a ferocious rise. If you see the earlier rise from 2,800 levels to 6,200, in relation to that, the current fall is marginal," says a leading stock broker whose market optimism is well known.

Oswal says that there is lot of liquidity in the system as the Bombay Stock Exchange does daily volumes of 2,000 to 2,500 crore. "The only thing is that the churn is not happening," he says.

Market operators also attribute Wednesday's 116.29 points market crash to the expiry of the February series futures.

So where is the market headed now? "There is still a lot of steam still left in the market and this is only a short term correction," says a broker.

Adds Oswal, "I am bullish at these levels as the fundamentals are strong and interest rates are low. These are the prices of the short term. It is not undervalued now and it won't be overvalued at 6,000."

Now, this is exactly what the government would like to hear before it hits the election trail in two month's time.