The wealth created by public enterprises should be shared with the people through a purely retail divestment.
The recent Congress Party manifesto has stated that “every Indian has a right to own shares in PSUs”. This is one promise it can live up to, and instantly. The initial public offerings (IPOs) of NHPC Ltd and Oil India have already been approved by Sebi and can enter the market right away. Others can follow.
The government should not wait for a further revival of the market to float these IPOs in the hope of getting better valuations. This is as good a time as any other because there is no such thing as ‘opportune time’. Private promoters can be greedy, government should not be. It should understand that the real and substantive gains would accrue to it later. As an example, let us look at the past five years during which four public sector IPOs hit the market. The value of the government holding has now gone up nearly three times from Rs 80,791 crore on the issue date to Rs 230,805 crore currently despite depressed markets. In one specific case, that of NTPC, the value of the government’s 89.5 per cent holding on the IPO date was Rs 45,754 crore. Today, this holding is worth Rs 157,002 crore, a gain of 243 per cent! This also means that investors in these IPOs have made similar gains.
The household savings of millions of retail investors can be brought to the capital market to boost the economy. Despite rising savings, less than five per cent of household savings are currently invested in the capital market and worse, in a country of over one billion population, we have at best just ten million equity investors. Moreover, these IPOs can actually be the instrument for reviving the market sentiment. Remember that it was a PSU divestment, of Maruti in June 2003, that had led to an earlier market recovery.
In fact, 2003-04 was the golden year for PSU divestments when public issues raised an astounding Rs 15,128 crore in just one month. Subsequent compulsions of coalition politics played spoilsport and the next five years saw a meagre Rs 4,498 crore of divestment. This can now be reversed.
There are other equally compelling arguments in favour of IPOs from public sector undertakings (PSUs). For one, there cannot be any complaints about such divestment because allotments are to anonymous investors. For another, they help to bridge the fiscal deficit, a major cause of concern right now. Estimates of how much money the government can raise through token divestments range from Rs 100,000 crore to Rs 250,000 crore. Another argument is that listing increases transparency and accountability along with better efficiencies.
Equally important is that the public offering route can provide much needed depth and width to our capital market. A scarcity of listed companies and listed capital continues to cause excessive speculation and volatility.
To make the huge divestments happen, there is a need to be pragmatic. The only opposition to partial divestment could come from employees of some PSUs. To counter this, employee stock options (ESOPs) should be introduced which would not only reward the employees and thereby win their support, but would also enlist their long-term commitment.
This apart a more relaxed regulatory framework is required to make the IPOs successful. Here are some suggestions:
n Relax the minimum offering clause. Even at five per cent, the issue size in many cases will be very large, so the focus should be on the float size and not on the percentage.
n Drop the requirement of independent directors. PSUs in any case are accountable to the Central Vigilance Commission (CVC), Comptroller and Auditor General of India (CAG) and Parliament. Besides, despite non-compliance for more than three years by listed PSUs no regulatory action has been taken.
n Dispense with IPO grading: PSUs already enjoy a high credential.
n Offer these only to the retail investors. Questions may be raised about the depth of the retail market. This, as ever, is a bogey, given the experience of the recent past. The Reliance Power IPO could attract as many as 4.62 million retail investors who collectively put in a massive Rs 39,919 crore as advance application money in just five days. And, these were man-on-the-street investors, who put in applications of less than Rs 1 lakh each and were genuine investors following the strict enforcement of regulations post the IPO scam. A retail only policy will have a major positive impact: a very wide distribution reduces post-listing selling pressure. On the other hand, large sales by institutional investors often destabilises the price. A clinching argument: It would also be a politically correct policy. What better way to please millions!
Offer IPOs at reasonable prices and FPOs at a discount of at least 10 per cent to the market price. This may not maximise returns for the government, but it is one way of acknowledging that the wealth created by public enterprises through domestic public resources should be shared with the public. In any case, true price discovery post listing, as demonstrated above, would get government much larger gains than the small loss it may incur in pricing the IPOs low. Moreover, there would be no post-listing price pressures/embarrassments — the PSUs would forever be in the investors’ thank you list!
n Use only the fixed price route. Retail investors are ill-equipped for book-building.
n Ensure a wide distribution. No individual investor should be allotted shares worth more than Rs 1 lakh.
n Stagger the issues. The government should learn from the fiasco of 2004 and use new ASBA (application supported by blocked amount) system. This would also release monies quickly for the investors to apply in successive IPOs.
n Allow allotments in physical mode: Investors would be saved from the hassles of opening demat accounts. They would also save on custodial charges since many investors may like to hold the stocks for long periods. Only for selling, such demat account be made mandatory.
The divestment process can begin with a bang and continue to create new milestones. With all these offerings, the shape and size of the Indian capital market will change for ever — and for the better. It would be a pity if these got stalled because of government’s greed or regulatory hurdles.
It would, of course, be a dream prospect if government monopolies, such as post & telegraph and railways, are corporatised and offered to the public for investment. Even a token divestment in these undertakings would rake in very large sums for a cash-strapped government.
Prithvi Haldea is chairman & managing director of Prime Database
