Small investors left out of divestment via OFS

Only 1.4% retail participation in 10 PSU share sales by this route

Participation by retail investors - those investing less than Rs 2 lakh - has been abysmally low in government disinvestment done through the Offer for Sale (OFS) route.

In the 10 government share sales done this way, considered quick and cost-effective for the seller, small investors have bought, on average, 1.4 per cent of the total shares sold. The biggest chunk was taken by institutional investors, comprising mutual funds, insurance companies and foreign institutional investors.

Data with the Securities and Exchange Board of India (Sebi), provided by stock exchanges, show the average high net worth individual participation in these share sales has been around 31 per cent. A little over two-thirds was bought by institutions.

In contrast, retail participation in government disinvestment done through the follow-on public offer (FPO) route has been encouraging. The Centre had sold stake in Power Grid Corporation and Engineers India through the FPO route last year. In both, the 35 per cent portion meant for retail investors was oversubscribed.

Market players said small investors have not yet cracked the OFS route. "Public sector Undertaking (PSU) disinvestments are something that retail investors look forward to. It won't be wrong to say that most individual investors aren't acclimatised with the OFS route, as they are with IPOs (initial public offers) and FPOs," said an investment banker, asking not to be named.

Leaving out the retail investor defeats the government's objective of promoting 'people's ownership' in PSUs, he added.

Arun Kejriwal, director, Kris Securities, said retail investors have been wary of OFS due to the bidding process. "The price isn't fixed, unlike an IPO. There is a floor price given and investors have to bid higher. Retail investors aren't too comfortable with this mechanism."

Since its introduction in 2012, the OFS has emerged as the most preferred route by promoters, including the government, for disinvestment. Unlike an IPO or FPO, an issuer doesn't have to file a lengthy prospectus with the market regulator or have to seek approvals under the OFS route. A little over 100 companies have used the OFS route so far.

Recently, to boost retail investor participation, Sebi made some changes in the OFS framework. Under the new system, Sebi has mandated 10 per cent reservation for retail investors, with provisions to offer them discounts. There haven't been any sales through OFS since the rule change. However, some market players are sceptical on whether this will help improve retail investor participation.

"It is unlikely that small investors will still be as comfortable as they are with IPOs," said the banker quoted above.

Others say if the share sale is of a good company and with a decent discount, retail investors will be attracted. They also said the discount offered to retail investors will encourage arbitrage trades - buying at a discount in share sales and selling in the secondary market at a higher rate.