LIC plays disinvestment saviour

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Accounts for more than half the money raised through disinvestments.

When financial year 2009-10 ends, the government would have raised Rs 19,290 crore through divesting its stake in public sector units, taking it closer to the target of Rs 25,000 crore.

The credit for this goes largely to another government organisation, Life Insurance Corporation of India (LIC), which accounted for more than half the money raised.

By diluting its stake in five public sector undertakings — NTPC, Oil India, NHPC, Rural Electrification Corporation and NMDC — the government's disinvestment proceeds would be close to Rs 23,549 crore. While in Oil India and NHPC, the government raised money through initial public offerings (IPO), it took the follow-on public offer (FPO) route for NTPC, REC and NMDC.

In case of REC, LIC would not get shares as it bid at Rs 205 a share, while the cut-off price for allotment was Rs 206 per share, said sources. An REC spokesperson confirmed that LIC’s bids were rejected on “technical grounds”.

Though the issues sailed through, investment bankers are raising questions on the efficacy of the process. The issue of NMDC, a Navaratna company with almost 98 per cent shares held by the government, got a poor response from retail investors, although it was subscribed 1.25 times. Of Rs 9,928 crore raised, about 60 per cent, or Rs 6,000 crore, was from LIC. In NTPC, out of Rs 8,480 crore raised, LIC invested Rs 4,263 crore.

“It is clearly a transfer of ownership from one institution to another. Strictly speaking, it would not qualify as disinvestment, because the aim of price discovery and wider ownership was not met,” said Arun Kejriwal of Kejriwal Research & Investment Services.

Analysts said the pricing of the FPOs was not realistic enough to attract retail investors. “It is not disinvestment in the true spirit as far as retail participation is concerned. The only problem seems to be the pricing, as otherwise there is no problem with the quality of these companies,” said Prithvi Haldea, chairman and managing director, Prime Database.

However, FPOs have certain inherent problems vis-à-vis IPOs. “In an IPO, there is price discovery, and so there is an attraction for retail investors. In FPOs, unless the price is substantially below the market price, there is not much incentive for investors. This is the reason many companies go for a rights issue or a QIP (qualified institutional placement) instead,” said DR Dogra, MD and CEO, Care Ratings.

LIC is one of the biggest institutional investors. Its total premium is expected to touch Rs 176,000 crore by the end of March 2010, up from Rs 153,000 crore last year. Total investments this year are expected to reach Rs 200,000 crore.