Move follows abysmal staff participation in divestment; to begin with NBCC, NFL issues
The Union government has planned to pay brokers a commission to encourage staffers in divesting public sector units (PSUs) to subscribe to these issues. The divestment programme planned for this year is Rs 40,000 crore.
The provision will be implemented with the coming Initial Public Offer of National Building Construction Corporation and the Follow-on offering (FPO) of National Fertilizers Ltd.
Both companies have made a provision to pay a commission of 25 basis points on shares allotted to employees. This means on every Rs 1 lakh worth of shares allotted to PSU employees, the broker gets Rs 250. In the first instance, the brokerage will be paid by the appointed merchant banker. On successful completion of the transaction, the brokerage would be reimbursed on proof of actual disbursement. The appointed book running lead managers may pay additional brokerage over and above the government offer.
According to public issue norms, up to 10 per cent of an issue can be reserved for employees of a company, subject to a cap of five per cent of the post-issue capital of the company. Given the Rs 40,000 crore divestment plan, the government can reserve up to Rs 4,000 crore worth of shares for PSU employees this year. If the brokers manage to get all these allotted to employees, they can earn an additional income of up to Rs 10 crore. “Employee subscription is important. The brokers need some motivation to canvas for these investments. We are paying them slightly less than what we pay for retail investments, as the company itself makes efforts to get the employees to invest,” a senior official in the department of disinvestment told Business Standard.
Staff not enthused
Employee subscription has been quite low in many disinvestment issues. According to a Business Standard Research Bureau study, of the 12 disinvestment issues that hit the market since the UPA government restarted disinvestments in 2009, in only one issue was the employees quota fully subscribed.
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Only 35 per cent of the total shares earmarked in these issues were allotted to the eligible employees. Some of the larger issues like Coal India and NMDC saw a tenth of the shares earmarked for employees being subscribed.
The unsubscribed portion of shares earmarked for employees gets distributed to other categories of subscribers. At an event launching the FPO of Power Finance Corporation last month, Sumit Bose, secretary, disinvestment department, had said all categories of investors had seen good subscriptions, except for the employee quota. He had said the department would look at measures to address this.
An investment banker handling the PSU issues said, “ When employees pick application forms, these typically have stamps of brokers. But there was no clarity who will bear the cost. Now with this provision, government will pay 25 bps. It is lesser than retail because there is often no marketing effort from the broker, as a lot of it is done by the company itself.:”
The initial disinvestment issues did not incentivise the brokers. In fact, the bid documents for the issues of NMDC, NTPC and Rural Electrification Corporation (REC), which hit the market in the first half of 2010, clearly stated the government would not pay any brokerage at all. Barely 16 per cent of retail investors subscribed to NTPC’s FPO. That of REC gathered 25 per cent subscription from them; of NMDC, 21 per cent.
After which, the government decided to pay commission to brokers for retail investments and those from high net worth (HNI) investors, beginning with the IPO of SJVN Ltd in May 2010. The brokerage is 0.35 per cent for retail investors and 0.15 per cent for HNIs.