Quiet and quick PSU divestment

The Government has collected nearly Rs 22,000 crore out of divesting its stakes in public sector undertakings (PSU) so far in the current fiscal, which is roughly three-fourths of the total targeted revenues of Rs 30,000 crore.

The four PSUs where the divestment has been completed are Hindustan Copper (Rs 1,375 crore), NMDC Ltd (Rs 5,828 crore), Oil India (Rs 3,065 crore) and NTPC (Rs 11,430 crore).

There are three more companies — MMTC, National Aluminium Company and Steel Authority of India Ltd — where one can expect sell-offs to happen in the course of the remaining seven weeks of the fiscal. While that might make the Rs 30,000 crore target for 2012-13 seemingly attainable, the Secretary in the Department of Disinvestment, Ravi Mathur, has sought to project a more modest Rs 27,000 crore.

The OFS route

There have been two distinct features of the divestment process during the current year. The first is its quiet and quick execution without much fanfare. The second is the low expenses involved because of no recourse to massive roadshows and publicity campaigns or the requirement of bulky documentation to be filed with the capital markets regulator.

Both these features have to do with the method of disinvestment adopted in all the four PSUs — what is called ‘offer for sale of shares through the stock exchange mechanism’ or OFS.

The OFS is a just one-year-old route that was approved by the Securities and Exchange Board of India on January 3, 2012 and notified on February 1, which was followed by issuance of comprehensive guidelines on July 18 and revision of these on January 25 this year.

The OFS mechanism is not exclusive for PSU disinvestment though: Any of the top 100 listed companies by market capitalisation (which includes those in the list in any of the last four completed quarters) can opt for this mechanism.

The first time that the above method was used, in the case of ONGC disinvestment in early March, the experience wasn’t quite successful.

The offer sailed through only because of the Life Insurance Corporation of India (LIC) bailing out the Government. The same was the case with Hindustan Copper, where, too, it was primarily LIC and other state-owned financial institutions that picked up bulk of the shares on offer.

But the last three sales of NMDC, Oil India and NTPC have seen things change, with foreign institutional investors (FIIs) bidding in a big way and signalling ‘genuine’ investor participation. This is clear, especially with regard to the last two stake sales: In the case of the NTPC OFS, there was significant participation from even ‘clients’ of brokerages (see Table). Many of them may be high net-worth individuals, but are still representative of retail participation.

Retail investors

One major criticism of the OFS route, in fact, is that it does not encourage retail investors, as there is neither any quota (minimum 35 per cent in the case of Initial Public Offer/Follow-On Public Offer) nor a special discount for such investors.

Moreover, it is not easy for retail investors to bid at auctions — which is what the OFS essentially is — like FIIs and other institutions.

The consolation, though, is that retail investors can still buy the shares of Hindustan Copper and NMDC, given that their current market prices of Rs 124 and Rs 147.1 (as on February 8) are ruling below or almost equal to the levels at which they were divested.

Also, the Government intends to float the IPOs of Hindustan Aeronautics and Rashtriya Ispat Nigam Ltd, apart from a likely FPO of Rashtriya Chemical and Fertilisers, where there would be quotas for retail investors.

But they may have to wait for next fiscal for these issues.

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