No need, there’s a big appetite for rightly-priced IPOs in well-managed companies, but it may make sense to leave the decision to the board of each company
Nirmal Jain
Chairman, India Infoline Ltd
Superior liquidity gets a high price-to-earnings multiple and better valuations which will help the government raise additional resources and contain the fiscal deficit
In his Budget speech 2009 -2010, the finance minister proposed raising the threshold for non-promoter public shareholding for all listed companies, private sector and public sector units (PSUs), to 25 per cent and this has to be done over the next three to five years with annual addition of not less than 5 per cent. The arguments in favour of this, which apply to private sector and PSUs, are:
- A higher public float increases depth and liquidity in the market, attracting good-quality, long-term investors to the stock. As all of us know, such investors benefit shareholders in general by helping improve corporate governance.
- A higher public float and frequent trading reduce the impact cost of buying and selling shares and helps better price discovery.
- A large and dispersed shareholding will reduce the risk or vulnerability of the stock to price manipulation.
There have been concerns that a deluge of PSU paper will prevent the market from allowing the disinvestment of other PSUs in which the government wants to divest. I think this is a myth. In fact, there is a huge amount of capital available, particularly from foreign institutional investors (FIIs), for rightly-priced initial public offerings (IPOs). Most PSUs are well-managed companies so their shares would generate significant appetite. And we must learn from the recently-closed IPO of the Agricultural Bank of China (AgBank) in which just one bank raised a record $22.1 billion.
Even if all our PSUs comply with the new public shareholding over the next three to five years, the additional paper for all of them put together will be roughly $10 billion a year. A higher free float, particularly of large, established and reputed companies, has many other advantages. It enhances India’s relative weight in global indices and helps attract more capital.
Also, historically, all large IPOs have attracted many new retail investors and we see a surge in new demat accounts. Typically, retail investors enter the equity markets through IPOs so that they do not have to take decisions on pricing or timing of their investment. Once they are in the money, they gain confidence in increasing their asset allocation to equities. The recent poor response to IPOs has been due to aggressive pricing and greed on the part of issuers and bankers. That should not be mistaken for the market’s inability to absorb paper.
Also, it may appear paradoxical but superior liquidity gets a high price-to-earnings multiple and, therefore, better valuations and this will help the government raise additional resources and contain the fiscal deficit. Improving macro fundamentals will further enhance investor sentiment towards the country and the stock markets. India’s economic and corporate fundamentals are very attractive. The issue that most potential investors (institutional and individual) face is unattractive valuations. The supply of quality paper can attract and absorb capital that is sitting on the fence and help markets grow as the engine for sustaining economic growth and also help Indian markets gain critical mass for global recognition.
We have also seen that increased public ownership and exposure to the international investing community and analysts improve the management and functioning of an enterprise. PSUs should increase public shareholding in such a way that the shares are offered to retail public investors since PSU enterprises are public-owned anyway and a part of them may be owned widely by retail public investors. This will also silence critics who question why there isn’t a level playing field for the private and public sectors.
I don’t think there are overriding reasons to shy away from the new norm for PSUs at this point in time. The alternative is to link the extent of public float to market capitalisation. For instance, companies with a market cap of Rs 10,000 crore and above could have a 10 per cent public float instead of 25 per cent, and so on for both private and public sector companies.
U D Choubey
Director General, SCOPE*
One consideration for mandatory listing is that corporations manipulate the market. PSUs can’t be placed in the same bracket since they do not play the market
Public sector enterprises (PSUs) in India represent a class of superb, system-oriented corporate entities. Any mandatory listing may adversely affect their credibility, market standing and autonomy. PSUs don’t shy away from meeting listing norms, but doing so requires appropriate timing and it should be left to respective boards to decide the time frame, amount and valuation, depending on market conditions.
PSUs in India were established on the twin premises of economic development and social justice. A post-independence agrarian-based economy required a shift to an industry-based economy. Profit was not the only objective and PSUs were more concerned with socio-economic issues so the result was comparatively lower profit. Post-liberalisation, reforms in PSUs provided a solid foundation, as a result of which PSUs have been branded the creator of wealth for the nation. The period 1990 to 2010 saw a phenomenal increase in the all-round development of PSUs, whether it was an almost 10 times increase in turnover, a 35 times increase in net profit and sustained positive growth even during the economic meltdown. This is why Indian PSUs became a role model for the world during the recession. Today, PSUs account for one-third of the government’s revenue, about 1 per cent of the over 4,000 companies listed on the market and 25 per cent of the market capitalisation.
One of the considerations for mandatory listing is that corporations manipulate the market from time to time and there was a need for regulatory and ethical norms. It would be worth mentioning that public sector enterprises can’t and should not be placed in the same bracket as large corporations since PSUs do not play the market. There are a large number of checks and balances together with mandatory provisions such as internal and external audit systems, board audit committees, the Comptroller and Auditor General (CAG) and disclosures norms for board-level positions that keep PSUs away from unethical dealings and market manipulation. There is a proper transparent annual accounting system and, above all, the Central Vigilance Commission guards the guardians in PSUs.
The post-liberalisation listing of PSUs has brought out hidden worth. As of now, a little over 50 PSUs (including banks) have been listed, of which 25 to 30 have a public float of less than 25 per cent. Listing to such a level would require about Rs 1,25,000 crore. If all the PSUs are taken into consideration, listing to that level may require over Rs 3,80,000 crore. The next question that arises is: where is the appetite? Flooding the market with many offerings will subdue the capital market and the real worth of the PSUs in such cases may not come out. Listing some of the best PSUs in the recent past gave such an indication and, therefore, PSUs should not, need not and cannot be put under a time-bound mandatory listing, whether it is 25 per cent or even 10 per cent.
One of the other considerations given in favour of listing is the accountability factor for large many shareholders. This logic probably does not hold good for PSUs because, being government-held, they are also accountable to the people at large because government is of, for and by the people. PSUs are the custodian of public money and, therefore, are accountable to the public and are responsible to Parliament through its committee on public undertaking (COPU). PSUs are accessible through the “right to information” (RTI) law and, therefore, represent an altogether different class in the corporate sector. All these indicate that PSUs can’t be put in the same basket with other corporations.
Therefore, mandatory listing would not be appropriate for PSUs and if such provision is required for PSUs, it would be best to consider a 10 per cent employee stock option (Esop) and incentivise it to solve the issue of attrition and improve employees’ sense of belonging.
*Standing Conference of Public Enterprises
