The Industrial and Commercial Bank of China (ICBC) created history in October 2006, when it listed simultaneously in Hong Kong and Shanghai stock exchanges, raising more than $19 billion in its initial public offer (IPO) of shares.
Although a tiny sliver of shares were made available for retail investors, the oversubscription was 78 times in Hong Kong and 49 times in Shanghai from the mainland investors. Some of this euphoria was due to the year-long ban on IPOs in the mainland, and due to infrequent opportunities for participating in Chinese privatisation. On its debut, the stock shot up considerably, taking the entire index up by more than 1 per cent. Nearly four years later, ICBC remains the biggest bank in the world by market capitalisation, never mind that its floating stock is much smaller than that of its western peers, and valuation of its bad debt is much more generous than what Basel would allow. Despite the Wall Street-induced financial crisis in the intervening years, its stock price is still more than 60 per cent above its listing price, and going by growth of Chinese credit, ICBC is going to be doing very good business till (middle) kingdom come.
The story of ICBC is part of the folklore in the stock markets. It serves as a holy grail benchmark of what’s possible when you privatise large government-owned entities. Hence, that legendary IPO may have some relevance to India, where the government is currently trying to offload shares of hitherto-unlisted giant enterprises. Of course, these are not in banking (e.g., BSNL or Coal India), but they have attracted wildly-optimistic valuations, and, inevitably, ICBC may be taken as a reference. After all, like in the case of ICBC, India’s disinvestment also comes after a drought of IPOs by the public sector, so in principle, there ought to be hunger for PSU shares. From the finance minister’s speech we know that the government is committed to raising Rs 40,000 crore from disinvestment next year, and the preferred route is to spread ownership widely among retail investors by divvying up a small slice of each of these and other companies.
But comparison with ICBC may be unwise for several reasons. Firstly, we are in post-crisis sober times of 2010, not the wild super-cycle year of 2006. Secondly, in the case of ICBC, there was an assiduous wooing of global cornerstone investors, i.e., global banks that promised to hold on to ICBC shares for at least a year post-listing. This role of cornerstone investors cannot be played by domestic giants like LIC or SBI. They have to be global players, willing to make credible commitments. And thirdly, ICBC’s IPO also made room for strategic investors, from whom it sought to gain management expertise and international perspective, which does not seem to be the case in the Indian context. Most importantly, even though the ICBC IPO was all about maximising listing value, it was not driven by a fiscal deficit. It was backed by a strategic desire to go global.
Hence, ICBC’s relevance is limited. In the Indian context, the starting point is fiscal compulsion. There is thus a subtext of a reluctant privatiser. Hence, with an eye on keeping the listing value high, the discount that is actually offered in the sale of shares is insufficient to excite the retail investor. The lukewarm response of the retail investor to REC, NTPC and NMDC should give us a pause about using an ICBC like template or, indeed, any revenue-maximising template. Asking LIC or SBI to keep bailing out sputtering issues is pointless, and based on unsound governance. In case of NMDC, the high price and high implied valuation were based on an extremely tiny float, making its issue almost like an IPO. Such an artificially-high valuation, and high P-E multiple near 50, is unlikely to sustain in the absence of anchor investors a la ICBC. With dilution comes better price discovery, but the current process does not guarantee a smoother transition to that more correct price.
Can we then convert our fiscal necessity into a virtue? Is there a better way to politically sell bigger discounts for the upcoming IPOs and not being under the shadow of ICBC? Yes, there is, and a blueprint was recently given in a public speech by Thirteenth Finance Commission Chairman Vijay Kelkar. The first and the most important change that we need is that of mindset. Think of disinvestment as a portfolio reshuffle, said Dr Kelkar. We need to drastically alter the mix of public ownership from physical to social and human capital. Which means less coal mines and telecom, but more of rural health clinics and rural roads owned by the government.
During the early days of India’s development, the public sector took control of the commanding heights of the economy, namely infrastructure, big industry, utilities and such like. Six decades later, it is time to change that portfolio-mix. It is not asking for shrinkage of the government, but reorientation towards what is not provided by competitive markets. The second factor driving privatisation should be efficiency. The physical capital that is under the control of the public sector is roughly 50 per cent of GDP, but the return that it produces is less than 3 per cent of GDP. Even if this rate of return does not need to match private or global rates, and even after making allowance for social goals (like spread of rural telecom, or employment generation), there is substantial improvement possible in the rate of return on public capital. The third rationale, as articulated by the finance minister in July 2009, is to create dispersed ownership. This practically rules out sale to a strategic partner. But to ensure a better price discovery, and indeed to quell potential political hue and cry, a continuous pre-announced dribble sale of small quantities of shares may be necessary, especially in case of giants like BSNL or Coal India. This also obviates the need for an anchor investor(s) a la ICBC. Finally, to ensure wider retail participation and eventual ownership, it is essential that a large discount be given initially, which is progressively narrowed as sales continue “on tap”. This innovative approach to privatisation is sure to create its own stock market folklore, with fiscal improvement as a bonus. An Indian ICBC fairy tale? It’s possible.
The author is chief economist, Aditya Birla Group.
Views expressed are personal