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| PSUs' peculiar problem |
| Devangshu Datta / New Delhi Nov 15, 2009, 00:39 IST |
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With profit-making not being the sole motive of public units, caution needs to be exercised while investing in their IPOs.
The decision that profitable, unlisted public sector units (PSUs) should have a minimum of 10 per cent public shareholding has created a buzz around government-controlled businesses. If the Government of India holding in every PSU with a 3-year profitability record is pruned to 90 per cent, it's not unrealistic to expect that upwards of $10 billion can be raised.
It makes a great deal of sense from the government perspective. Selling off 10 per cent doesn't loosen babudom's grip on management, while raising free money. The decision has undoubtedly been triggered by the twin successes of the NHPC and OIL initial public offerings (IPOs). Both issues saw substantial over-subscription and together, raised nearly $2 billion.
Over two decades, North Block has also developed basic respect for market mechanisms. Recent government IPOs have been handled the same way as private sector listings. Lead managers have been appointed; DRHPs filed; books built; Clause 49 of the listing agreement met.
All this is in refreshing contrast to earlier tranches of disinvestments. In 1991, shares were force-fed in opaquely-priced baskets, to UTI and LIC. It is also a sea-change from the Yashwant Sinha concept of cross-holdings, which was essentially a method of milking reserves.
Generally speaking, listing companies is a good idea. It allows investors to participate in wealth creation. Valuations become more transparent and management is compelled to release more pertinent information.
Quite a few PSUs could be potential beneficiaries. For example, dividend-paying giants like BSNL, Coal India and various major ports have no public shareholdings at all. There are also many PSUs where government holdings are in excess of 90 per cent. These could benefit from follow-on issues that allow them to raise more capital. This list would include MMTC, Hindustan Copper, Rashtriya Chemicals and Fertilisers, Neyveli Lignite, National Fertilisers, State Trading Corp, National Mining Development Corp, etc,.
What is more, there would be a positive feedback loop if some PSU issues went through successfully. It is easy enough for a tightly-held listed company to tap the market through private placement or by pledging equity and this is far cheaper and quicker than raising conventional debt.
However, this is the rationale for the government. The view from the other side is more nuanced. Should investors be interested in PSU IPOs? There have been some superb PSU IPOs. Where offer valuations have been moderate, investors had no reason to complain. IPOs such as Maruti, ONGC, NTPC, Power Grid, IDFC, Power Trading, and various PSU banks have generated excellent returns.
But there have also been dogs. Investors have lost out whenever pricing was too rich or government mismanaged the business, or made policy decisions contrary to the interests of minority shareholders. For instance, the situations that developed in HPCL, BPCL, Indian Oil, IFCI and IDBI are akin to cautionary tales. Even good businesses like Concor, SCI, BHEL, MTNL and SAIL have offered unexciting returns due to initial mispricing.
The issue of policy-management-shareholder conflict is odd since it contradicts private sector experience. Private sector companies like Reliance, Hindustan Motors, Airtel, etc., have historically received valuation premiums because of their perceived ability to manage the policy environment. But when the policymaker is itself in charge of management, it doesn't necessarily do a good job. This adds to the risk for a minority PSU shareholder.
PSUs also suffer from built-in inefficiencies. Cumbersome government procedures and interference from ministries often slow down processes. While many PSUs possess strong technical skills, most are less aggressive than their private sector counterparts. Very few are even aware of the concept of delivering customer satisfaction. As a result, many PSUs have lost market share as the environment has become more competitive.
There is a certain type of investor, who refuses to touch all IPOs on principle since the specifics of an unlisted business are more difficult to analyse or understand, due to lack of information. We also know that PSUs can be run on more irrational lines since shareholder profit is rarely, if ever, the sole motive.
So, while it makes absolute sense for the government to pare stakes, it makes equal sense for investors to be extra cautious when dabbling in PSU IPOs. The minority shareholder in an IPO accepts larger risks than minority shareholders in normal businesses. Offer valuations have to be very conservative to consider taking on the extra risk.
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