How not to disinvest

VALUE FOR MONEY

Ever since disinvestment got going in a most oblique and inefficient way in the early nineties, a large number of public issues of credible public sector companies are hitting the market for the first time.

This is a golden opportunity for the Indian capital market to become broader and deeper and hopefully over time less driven by foreign institutional investment. That can happen if there is a rise in the relative size and clout of the aggregated domestic play in the market.

As at the bottom of that domestic play sits the so called small investor, the key issue is two fold. Have the present offerings, mostly from government companies, kept the interests of the small investor in mind?

Or, is it more important to simply ensure a healthy market in harmony with global realities? The logic being, if you take care of the market it will take care of the small investor.

One way of ensuring a bigger domestic play would have been to offer these issues only to domestic investors. But it will be odd to do so when individual Indian residents are being allowed to make a token investment across the border.

So it would be sensible to keep these issues open for foreign institutional investors while allowing a handicap to domestic investors. The final package consists of a discount to the small investor and a floor price for the bigger issues.

The two may not go together. If you wish to offer something to someone at a reasonable price, surely the greater need is to have a ceiling, not a floor price?

Some have suggested that a good way to get out of the floor versus ceiling issue is to have two issues, a fixed price one for the small investor and an issue through book building for large investors, foreign and domestic. But that has not been done.

Instead, the political battle over disinvestments and the need for the finance ministry to garner as much as possible before March 31 have created their own set of problems.

Precisely when everything should have been going right, there is a risk that the pitch may be queered by too many public offers being bunched together.

The first risk from the bunching is that there may not be enough of ingestible funds to make all or most of them a success. The situation also gets aggravated by the fact that this is the peak time when advance tax is paid, thus sucking out of the system the maximum amount of liquidity.

Under-subscription in some cases and only marginal over-subscription in others can queer the pitch for public issues down the road. Worse, the resultant reversal of sentiment has the potential to ring a premature end to the current bull run.

The small investor right now faces two problems. One, he cannot apply for issues sequentially by using the refunds from earlier issues for subsequent issues. It can of course be argued that such a scenario will have a positive impact, in that it will force small investors to make a real choice.

They will be forced to apply for only those scrips that they really wish to hold and not apply more to make a quick buck from early exit on listing. However, if you are small investor friendly, you will not mind that.

The other problem facing the small investor is more intractable. It is created by there being only a floor price instead of a floor-ceiling range for the more popular issues. This creates the real possibility of the big boys so bidding up the price that the issue is finally closed way above the floor. This will be unaffordable to the small investor.

Even if a floor-ceiling band is declared for future issues, that may not solve too many problems. An under-priced and so hugely oversubscribed issue can lead to problems of allotment. A not so small investor can hide behind multiple small identities.

An artificially low price can also create audit problems in the future for public sector companies, with the auditor declaring that the exchequer was deprived of a fair price for state assets.

There is a strong school of thought in favour of clear limits to being partial to the small investor. This holds that an issue should be priced at no more than a marginal discount to the price at which it will get fully subscribed.

The Infosys ADR issue is remembered in this regard. It left something on the table for the secondary market, thus giving it robustness and making the company popular for not being too greedy.

But the key point is that this is possible only at the margin. If large investors insist on seeing great value in a scrip then there is nothing you can do other than to acknowledge it in the price.

What is the worst case scenario? The odd issue fails, several get only marginally oversubscribed, with small investors getting a bigger allotment than they had bargained for and a few topline issues get priced way above the floor, making them virtually unaffordable to the small investor.

This can be the market's way of selecting between the strong, weak and the incapable. If big players have bet too heavily on a few scrips then they will realise it at some time and prices will come down and paper will float back to the market.

More than anyone else, it is the government which will hopefully learn a few lessons. The first is never to bunch issues in this manner. The second is to have a clearer policy on pricing and declare a band at a realistic level. And realistic means a range within which the issue is marginally oversubscribed.

As for encouraging the small investor, he cannot be enticed in a day. If markets remain healthy, price rigging becomes a dwindling phenomenon, the economy keeps doing well and there is a steady supply of good paper, then the market will become truly broadbased. Then there will be a place in it for everybody, including the small investor.

sub@business-standard.com