The rock-bottom story of disinvestment

Like NTPC, in many companies where the government has been selling, the destruction of value is difficult to miss

It was February 2010. The Left-free United Progressive Alliance (UPA)–II government had taken up a disinvestment programme with new zeal. NTPC was one of the big candidates that year. The government was initially looking at Rs 250-300 a share. A five per cent sale could fetch Rs 13,000-15,000 crore, it was discussed.

At that time, quick-to-market instruments such as Offer for Sale (OFS) were not available. The follow-on offer, which came with its delays, eventually got sold at around Rs 200, raising Rs 8,500 crore. It was the first issue where Life Insurance Corporation (LIC) had to come in big to save face for the government.

LIC, which did not figure in the large shareholder list of NTPC in December 2009, was holding 3.51 per cent, it told the stock exchanges in March 2010, beginning a long love story. But, that is not the story I am trying to tell.

Six February’s later, the government again sold NTPC shares -- the same five per cent. Sale methods have significantly improved. After multiple tweakings and fine-tuning by the Securities and Exchange Board of India, the OFS is now a mean government share sale machine. It allows the government to sell at a day’s notice, cutting off short-sellers. It allows staggered sales, where retail could come in after seeing institutional response and so on.

For the corporation itself, sales grew to Rs 73,246 crore in FY15, from Rs 46,508 crore in FY09. Net profit rose to Rs 10,290 crore in FY15 from Rs 8,092 crore in FY09. As a result, earnings per share (EPS) was up from Rs 9.81 to Rs 12.48 in the period.

Yet, NTPC shares struggled to get sold at roughly half the valuation of what these were sold at in 2010. In comparison, despite the recent hiccups, the benchmark Sensex is about 50 per cent higher than its February 2010 value.

On a trailing price-equity ratio basis, NTPC shares fetched a little over 20 times the EPS of Rs 9.81 in 2010. When the government sold these again last month, needless to mention with LIC’s (over 12 per cent holding now) help, the floor price of Rs 122 was not even 10 times of the trailing EPS.

This is so different from what happened to NTPC in the first six years of its listed life. The Initial Public Offer in 2004 was a big hit, with heavy oversubscriptions in all categories. The stocks listed at Rs 62, the upper end of the price band, and had quadrupled in value by the time the disinvestment train swept in.

To a question on disinvestment after the Union Budget, finance minister Arun Jaitley said, “I am not in a desperate situation in terms of my fiscal deficit that I must sell at rock-bottom prices.”

People who bought NTPC shares in 2010 might be wondering how much more before these reach the ‘rock- bottom’.

NTPC is an example. In many companies where the government has been selling, the value destruction is difficult to miss. The reasons are no secrets. Government treats minority shareholders shabbily. Officials in the administrative ministry want puppets as heads, who will run public sector units like government departments. Independent directors, if at all they get appointed, are tossed around.

No promoter who has shares to sell can afford to do these. NTPC is living proof.

The government should also learn from private sector promoters about how to build demand for shares they want to sell. This cannot happen in a centralised manner. It cannot be only a 30-minute press conference. Each entity must go around marketing itself, address investor concerns, talk about growth not only in road shows but at every opportunity.

But, can puppets dance on their own?