Divestment: damp squib for retail investors

The Centre recently crossed the halfway mark of meeting its disinvestment target for FY18. In light of the RBI’s poor dole-out to the Centre this year, good progress on the disinvestment front is welcome. But in a bid to step up its disinvestment proceeds, the Centre has set exorbitant valuations for its recent insurance IPOs. General Insurance Corporation of India (GIC) and New India Assurance, big money-spinners, have been able to ring in nearly half of the total divestment proceeds (about ₹37,000 crore) in 2017 so far.

For retail investors though, these mega issues have left very little value on the table. GIC is down 13 per cent from its listing price, while New India Assurance plummeted nearly 10 per cent on listing day and is down nearly 16 per cent from its IPO price.

If these issues were indeed priced steep, how did they manage to sail through? Data suggests that it was thanks to the healthy bidding by institutions. Both issues had few takers from the retail segment.

Take the case of New India Assurance. While the issue just scraped through (1.19 times subscribed), the retail quota was subscribed just 0.11 times or 11 per cent.

Thanks to the QIB portion (Qualified Institutional Buyer) — mostly domestic financial institutions including banks and insurance companies — that was oversubscribed 2.3 times, the issue waded through without hiccups. Going by reports, LIC appears to have emerged as the knight in shining armour once again.

The IPO of GIC — the largest reinsurance company in India — was no different. While the retail portion was not subscribed fully (only 63 per cent) QIB was oversubscribed 2.25 times, again thanks to LIC pledging support. Of the 14 per cent public holding in GIC (post IPO), LIC now holds 7 per cent.

The lukewarm response from retail investors comes as no surprise. The Centre, seemingly in a desperate effort to meet its steep disinvestment target, has pegged up the valuations. While GIC was priced at around 24 times its FY17 earnings and four times book, New India Assurance came at a hefty 78 times earnings and five times book.

The Centre has budgeted to raise ₹72,500 crore this fiscal: ₹46,500 crore through divestment proceeds from stake sales in PSUs and ₹15,000 crore by way of strategic sales. Another ₹11,000 crore has been factored in by way of listing of insurance companies.

The Centre has managed to divest 12.5 per cent of its stake in GIC raising a tidy ₹9,704 crore; New India Assurance raking in another ₹7,600-odd crore.

Some would argue that if the recent issues are indeed pricey, then why are the QIBs lapping them up? The LIC’s bailout act had best be left out for another discussion. Given that the insurer has been mopping up shares on offer by the Centre time and again, even in beaten down markets, it has hardly emerged as a prudent money manager.

Some others argue that retail investors lack knowledge and understanding of the complex insurance sector to take a call. But this wouldn’t explain the rather good response to Reliance Nippon Life Asset Management — the AMC first to get listed or Central Depository Services India — that are also fairly new businesses to comprehend. Both issues have value for investors, given the reasonable pricing.

HUDCO and Cochin Shipyard saw good retail response given their attractive valuations. But these were obviously small fry in the Centre’s divestment agenda, raising around ₹1,200 crore and ₹470 crore, respectively. In a desperate attempt to plug the shortfall in revenues, the Centre, it appears, has tried to the make the most of divesting its stake in insurance businesses that command scarcity premium.

Many other state-owned enterprises have been given the go ahead for IPOs. Given that retail investors usually look up to IPOs of state-owned institutions, the Centre would do well to price them reasonably. Remember, despite many tweaks to disclosure and investor protection norms, issuers, backed by merchant bankers, are still able to demand ridiculous valuations. If state-owned institutions decide to play the same game, there is little small investors can hope to gain from these mega issues.

COMMENT NOW