In its hurry to meet revenue targets, the government is watering down regulations and hurting retail investors.
One of the many optimistic targets this government set for 2011-12 was its disinvestment revenue mobilisation forecast of Rs 40,000 crore. The fact that disinvestment has not taken off and that markets are subdued appears to have pushed the government into creating short cuts. Recent moves from the Securities and Exchange Board of India, or Sebi, are particularly disturbing when viewed in this light. Sebi has announced new mechanisms that allow company promoters to raise money. One of these is the institutional placement programme, or IPP. Earlier, Sebi required companies to perform a block trade or a follow-on public offer, such as happened with Coal India, in order to meet listing guidelines. It has now significantly watered down those requirements, allowing shares up to 10 per cent of the company to be directly placed with institutional shareholders. This is a clear circumvention of stock exchange listing rules, the spirit of which is that companies wishing to raise money from the market must have a minimum 25 per cent publicly listed shareholding. And one of the reasons the regulator has allowed it is to get quick money to the promoter of public sector enterprises — the government.
Any sign that the regulator is bending or watering down rules to suit the government is, in any case, problematic. Yet there are further concerns, too. The central idea behind disinvestment is to increase participation in the “commanding heights” of the economy by the retail investor, and to encourage public sector undertakings (PSUs) to observe market discipline and, hopefully, achieve greater efficiency. Both these essential aims are being lost sight of in the government’s haste, and in the regulator’s compliance in giving short shrift to procedures. Retail shareholders will not be able to directly invest under the institutional placement programme. As the Coal India public issue showed, there is considerable interest from small investors in some major government-held companies. The other mechanism, in which shares are sold through stock exchange windows, excludes retail investors completely.
In addition, it should be quite obvious that recent moves are a giant step back for the introduction of an independent corporate culture and efficiency to landmark public sector units. The government expected that PSUs would buy back shares; but now reports have emerged that ministries under which these PSUs operate have opposed buybacks, saying that they simply don’t have the cash to spare. And even if they did, would an independent company choose to buy back shares in the current supply-constrained atmosphere, or to reinvest profits in remunerative projects? If Coal India’s cash reserves are better used to finance its own projects, then using them instead to plug the government’s fiscal deficit hurts minority shareholders — and the central purpose of disinvestment: instilling market discipline and efficiency in PSUs. Instead, it makes them once again subservient to the government’s needs, mere cash cows that can finance overspending populism. India’s experience with disinvestment – the outcry over “bundling” of shares, for example – should teach caution. In any case, if the government has already got its additional borrowing plan for Rs 93,000 crore in place, why rush with disinvestment that has not been thought through properly?