Finding a balance

IFR Asia India Report 2013
5 min read

An Indian girl walks on a rope during the Festival of Gardens in northern city of Chandigarh.

Source: Reuters/Ajay Verma

An Indian girl walks on a rope during the Festival of Gardens in northern city of Chandigarh.

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A cash-strapped government, political and trade opposition and an extremely volatile equity capital market make the Indian Department of Disinvestment’s job of selling shares of state-owned companies a very challenging task.

So, it is not an exaggeration to say that Ravi Mathur has done a good job of selling the Indian Government’s stakes in state-owned companies since taking over as head of the department in January.

For the 2012-2013 financial year to March 31, the Indian Government raised a record Rs238 bn (US$3.6bn) through a programme that picked up steam in the second half of the year. It has set a target to raise as much as Rs400bn from the disposal of its interest in state-owned companies and Rs140bn from selling stakes in selected private companies in 2013-2014.

Two factors, such as paying heed to market conditions and selling the stakes to a wider investor base, have been keys to the department’s success. After attempting to complete a Rs124bn Oil & Natural Gas Corp offer for sale at premium to the traded price in March 2012, the department launched similar divestments at reasonable prices at discounts ranging from 5% to 71%.

“We regularly meet investors and give them the confidence that they are investing in good public sector companies with strong fundamentals,” Mathur said in an interview.

Market feedback and concerns have also prompted the government to delay any offers for sale under the disinvestment programme until the Indian rupee stabilises against the US dollar.

“We would like to watch for one or two months before launching any offers for sale. We cannot sell large chunks of equity in this type of market. Last year, the major disinvestments happened when the markets offered a window,” Mathur said.

The government was planning to launch offers for sale totalling a maximum US$2.2bn in Coal India and Indian Oil Corp. The premarketing of the Indian Oil stake was to start in September, but was pushed back.

The disinvestment programme is not without its critics. Two criticisms particularly stand out. The first is that the government leans on state-owned insurance companies to buy any unsold shares, effectively bailing out its disinvestment programme. The second is that, in selling shares of state-owned companies at sharp discounts to bridge its fiscal deficit, the government is eroding the values of existing shareholders.

Mathur, however, argues that allotments at offers for sale have been purely a function of market demand. In some of the popular offers for sale last year, state-owned Life Insurance Corp of India received no significant allocations.

“Investors invest when they like a company. In the Oil India OFS, LIC didn’t get any allotment and, in the NTPC OFS, it was allotted shares totalling Rs20bn, despite bidding for Rs60bn,” Mathur said.

Data from the government shows that foreign institutional investors accounted for 39% of the Rs238bn of shares sold in 2012-2013, while state-owned entities brought 35%.

As for the charge that the government sold shares at sharp discounts, Mathur said these were given only in stocks where the liquidity was extremely low and the traded price was not a reflection of the actual worth of the company.

The department is also looking at other ways to raise funds for the government besides share sales. It plans to raise up to Rs50bn through an Exchange Traded Fund for shares of listed public sector companies.

Mathur said 12 to15 from the total 48 listed state-owned companies will be part of the ETF. Goldman Sachs Asset Management is the AMC for the ETF.

With share prices quoting at a steep discount the government is not averse to asking cash rich state-owned companies to buy back their shares, Mathur said.

The government is holding discussions with the ministry of power and power developer NHPC to consider a share buyback programme.

“We are examining the idea of a buyback. Investors don’t like companies sitting on large cash and doing nothing. A buyback gives them an opportunity to use the cash and the share price also responds well,” Mathur said.

Finding a balance