There appears to be panic now with the entire divestment programme. An extreme reaction may be to just put the entire programme on hold in the hope of better market conditions (as if anyone can predict or define better market conditions!). The other reaction could be to learn from the experience and adopt a more pragmatic and long-lasting approach.
In my view, the government should reserve all shares for only the retail investors (how about a “Rahul Har Ghar Share Yojana”?). In this manner, the wealth created by public enterprises through domestic public resources shall be rightfully shared with the public. Also, this policy would be politically correct — what better opportunity to please millions and the aam aadmi! At the same time, this approach would help mobilise household savings of millions of retail investors, hence expanding India’s equity investor base currently languishing at less than 1 per cent of the population (A similar exercise by the Margaret Thatcher government in the UK helped increase the equity base from 4 per cent to 25 per cent). The remaining population is clearly wedded to safety, and PSUs are good quality papers that they want. Once these first-time investors come into the equity market, they would start understanding it, and would be prepared to allocate more capital to it. An only-retail policy will also ensure quite a wide distribution, reducing post-listing selling pressures.
The government should not wait for an “opportune time”, or attempt to maximise its gains. The offer prices should be reasonable. Surely, this shall not maximise returns for the government, but as seen in the past, besides many other gains/benefits, the government stands to make much larger gains even on the valuations compared to the small notional loss it may incur in pricing the IPOs low, given the small size of dilution. In the four PSU IPOs (NTPC, PFC, PGC and REC) during the past five financial years, the value of the government holding, courtesy the market, has gone up more than three times. In the case of NTPC, the value of the government holding has gone up from just Rs 45,754 crore on the IPO issue date five years ago to Rs 153,164 crore (as on February 4) — a gain of Rs 107,410 crore.
In the recent NTPC follow-on public offer (FPO), at the floor price of Rs 201, the government would have mobilised Rs 8,286 crore. If the entire issue had been sold to retail at, say, Rs 175, the proceeds would have been Rs 7, 214 crore. The loss to the government would have been just Rs 1,072 crore, as against the profit of Rs 107,410 crore!
In any case, there is nothing called maximisation. For example, NTPC touched a price of Rs 242 on December 31, 2009. Would anyone accuse the government of not making the FPO on that date to have maximised the proceeds, and subsequently incurring a loss of a huge Rs 1,700 crore?
None of the issue proceeds is accruing to any politician, bureaucrat, the ministry concerned or the company concerned; nor would it lead to any promotions or incentives/bonus for them. It is, therefore, all the more amazing that the issues are still focusing on maximisation. This is public money, and would go into public coffers. They may as well focus on the greater good, and take credit for expanding the investor base.
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Going forward, FPOs should be earmarked only for the retail investors under the fixed-price mechanism, and the retail price should be at a 20 per cent discount to the market price. For IPOs, 25 per cent of the issue can be earmarked for FIIs, but with the French auction system to discover the true price. This auction method for FPOs could be used only for companies like MMTC, which has a public float of only 0.67 per cent, or NMDC, which has a public float of only 1.62 per cent, and the auction book should be a closed one to enable the real price discovery.
Huge discounts to the retail investors would be free from any controversy, as allotments would be made to anonymous retail investors. This way, the PSUs would forever be in the investors’ “thank you” list, and there would be no post-listing embarrassments.
If need be, the government should come out with a new policy on divestment through public offers, giving itself the leeway to amend guidelines and full liberty on pricing, without the fear of the Central Vigilance Commission or the Comptroller and Auditor General.
NTPC is a case where, at first, you offer bad price for the retail segment; and when the retail investors do not subscribe, you use the old argument that the retail segment has no depth. The retail segment, however, has the depth. For example, how many investors would have been required in case the entire NTPC FPO had been earmarked for the retail segment alone? At a higher level, assuming application of Rs 100,000 each, the numbers works out to only 800,000. With applications of Rs 50,000 each, the number would have still only been 1.6 million — surely, an easy and achievable number. The IPO of NTPC had attracted 1.4 million investors.
If an all-retail policy is adopted, there would be a need to educate and service the retail investors. The government should look at launching a major print, TV and hoarding advertising campaign across the country.
There is a need to do some fresh thinking on distribution also. All bank branches as well as post offices should be converted into distribution points. Enough incentives should be given to the distributors. There is no mis-selling involved here; it is just a matter of how much efforts a distributor is prepared to make to reach out to new investors.
There is also a need to popularise the mechanism of Application Supported by Blocked Amount (Asba), which would be a boon for the retail investor, given the huge divestments.
Allotment in physical mode also needs to be permitted as this would save the investors from the hassle of opening demat accounts and custodial charges — many investors may like to hold the “family silver” for long periods of time. Only for selling should a demat account be mandated. This may be seen by some as a retrograde step, but we should realise the hard realities of India and what is more important are national priorities. This is not just a PSU offering stocks; this is the Government of India’s divestment programme. And all relevant agencies have to modify their rules and also participate to make it a success.
In the process, we need to do away with foreign investors (and wasteful foreign road shows). India is a large country with crores of potential investors and it also has more and stronger institutions — mutual funds, banks, insurance companies, the new pension scheme (NPS) etc., which have huge resources.
To get the policy and processes right, the government should immediately constitute a committee of experts, comprising domestic market practitioners, government representatives, the regulator, market experts and academicians.
The author is CMD, Prime Database