Ministers and equity prices

WORLD MONEY

Disinvestment Minister Arun Shourie's headline-attracting interventions in the stock market a few weeks ago (which surprised many of his admirers, including me) reminded me of a story by Shripad Krishna Kolhatkar, a renowned humorist in Marathi literature (his writings remain fresh even a century later).

The protagonist in the story is superstitious but likes to test his beliefs by experimenting. One day, while sitting with two of his friends, one of them having a post-prandial nap, he notices a lizard above his friend's head.

His scientific spirits aroused, he decides to test the superstition that if a lizard falls on your head, you are liable to die. Using a stick, he gets the lizard to fall on his napping friend's head and, when nothing happens, his faith in the superstition is shaken.

But his other friend explains that he had thrown a cat in the lizard's path, thereby frustrating the purpose. The story ends with the protagonist's faith in both the superstitions completely restored through scientific experimentation!

Consider the parallels with Shourie and the stock market over the past four weeks. In late February, before a spate of public offerings by major public sector undertakings, Shourie announced that a "bear cartel" was operating to hammer down the stock prices, and that the government had identified the people responsible for the fall.

Shourie is obviously not one of those who are content to wait and watch. As an activist disinvestment minister, he not only reported his suspicion to the prime minister, but called in the chief of the Intelligence Bureau (IB) to investigate.

He went on to propose the establishment of an Economic Intelligence Unit under the Cabinet Committee on Security. The suspect bears were called to Delhi, and talked to (I was about to say threatened with IB investigations).

Nationalised insurance companies and banks were also persuaded to support the public issues. (Such financial institutions under government control are so handy even for disinvestment purposes.)

The public issues, whose success was apparently considered by Shourie to be a matter of personal honour, went through smoothly. Presumably, this proves both that Shourie's suspicions about the existence of the bear cartel were correct and that his prompt actions saved the situation.

But perhaps there was a far more innocent explanation of the price fall in late February. The large increase in supply of shares then expected was bound to put downward pressure on the price.

In any case, the anxiety to complete the sale in the current fiscal year dictated the bunching of too many issues and the consequent price dampening effect.

What was surprising was how Shourie over-reacted. The history of ministerial pronouncements on the stock market post-liberalisation is not very pleasant.

Manmohan Singh, back in 1992, rightly told Parliament that he did not lose sleep over stock prices. Within a few days the Harshad Mehta scam was exposed, and poor Singh had to be involved with what was happening.

More recently, Yashwant Sinha took umbrage at the fall of the stock market in the wake of a widely-praised Budget. A "bear cartel" had to be in play. The Security and Exchange Board of India investigators, of course, managed to find the culprits "" at least, to their own satisfaction!

If Shourie seems to have over-reacted to the price fall preceding the public issues, he seems to be being unfairly criticised as far as the sale and resale of Centaur hotel is concerned.

In an undated press note I recently came across, the Communist Party of India (Marxist) refers to a Comptroller and Auditor General (CAG) report arguing that the Airports Authority has foregone a revenue of Rs 145 crore vis-à-vis the then about to-be-sold hotel.

It would appear that this is the gross revenues foregone over the next 30 years through a change in the terms of a lease that had not been executed. There are a few points one would like to raise:

• Is it correct to look at the gross amount as distinct from the current value of future receipts?
• If both the boards had agreed to the revisions, does the CAG have the authority to question the transaction without at least a prima facie case being made of mala fide? Or, is a reduction enough proof that something was wrong?
• Why was the non-execution of the lease for decades not questioned?

The key issue, of course, is that Centaur was sold by the government to a company for Rs 83 crore and resold in a short while for Rs 115 crore. Does this "prove" that the original sale price was wrong?

Indeed, that an asset is sold at a higher price at a later point of time is no indication that the original price was wrong or questionable.

Last June, the Maruti public issue was priced at Rs 125, and listed at Rs 165. Similarly, for Indraprastha Gas, it was Rs 45 and Rs 119, and for TV Today, Rs 95 and Rs 181. The story of the more recent public offerings is also not that different.

In short, resale at a higher price as compared to the original sale, whether in business or equity sales, by itself is no indicator of anything being wrong with the original price.

Email: avrco@vsnl.com