Here's how the disinvestment target can be met

Experts suggest closed auctions and retail discounts among other things to achieve its divestment target

Time is running out for the government as it rushes to meet its Rs 40,000 Cr disinvestment target, a key constituent in keeping the fiscal deficit under check. So far, with only Rs 1,325 Cr being garnered through a stake sale in 6 PSUs, the Prime Minister had called a high level meeting yesterday to give a push to the PSU stake sale program.

The FPO of PowerGrid Corporation of India (PGCIL) has already hit the market, being subscribed 69% on the first day itself and is expected to fetch the exchequer around Rs 1,758 Cr. IOC is likely to follow PGCIL in December which will be tailed by Engineers India Ltd (EIL) and Hindustan Aeronautics Ltd(HAL). However the divestment of Coal India and BHEL must also happen in the remaining 4 months if the government were to meet even half its ambitious target of Rs 40,000 Cr.

 

 

The pipeline is long, all kinds of modes are being discussed (ETFs, exchangeable bonds, FPOs, buybacks), but the government has faced several headwinds in its attempts to sell stakes in these big-ticket issues. Questions have been raised about the fiscal burden put on Indian Oil Corporation, Coal India Ltd is facing opposition from trade unions and BHEL has been held up because of unfavourable pricing and market conditions.

 

Given these delays, is there even a minute probability that the government could meet its targets and come to the market with successful issues? There is, say experts if the government does the following things –

 

#1 Offer big discounts to retail investors 
 

The hurdles cited are already discounted in the market prices and there is a huge hunger for good IPOs of established companies as the market has been pretty much dead for the last year, according to Prithvi Haldea of Prime Database. But retail investors have been largely absent from the markets and in order to lure them back, issues need to be priced very attractively. “IPOs should be widely distributed and priced correctly. Retail investors should be given a discount of at least 15-20% at the price discovered by institutional investors” suggests Haldea.

 

#2 Conduct closed auctions 

 

A lot of divestment candidates have also had their stock prices beaten down because of the tough economic environment, leading ministries and managements to oppose a dilution due to valuation concerns. “Precisely to avoid these concerns, we could conduct closed auctions and let long term institutional investors bid at higher prices” says Haldea.

 

Ashok Kumar, MD – Lotus Knowlwealth agrees. “Go for a bid. Allow large investors, even strategic partners to come in and bid for a large chunk rather than a 5-10% investment. This will also improve the corporate governance of PSUs and restore the 2nd facet of divestment that has been completely forgotten today – to bring in the private sector into the fold. Right now it is purely an accounting exercise. This will however be a politically unpalatable exercise.”

 

In the past, a strategic sale in Maruti resulted in a complete turnaround of the company’s fortunes.Even the closed auction route which was mooted and tested during the NDA regime, but never approved formally resulted in heavy interest from investors who had offered 100% premiums for stocks like HPCL and BPCL, according to an expert not wanting to be named.

 

#3 Get rid of SUTTI stakes

 

Finally Haldea suggests that the government should also focus on divesting stakes that it owns in private companies like ITC and Axis Bank through the Special Undertaking of Unit Trust of India (SUTTI). This too can be auctioned in the closed market as high investor interest in these stocks could ensure they are sold at a premium to their current market price. The government’s SUTTI assets are worth Rs 40,000 Cr and tapping into these funds might be necessary as the proceeds from disinvestment are unlikely to top Rs 24,000 cr, according to government officials this newspaper (Read here) spoke to.

 

Using these modes would not only garner the much needed moolah but also deepen capital markets and allow new investors to come in.This is much better than depending on LIC to buy unsold stock in order to meet subscription numbers, say experts.