By Manish Sharma

An aggressive disinvestment agenda lined up for the next fiscal is one of the key reasons behind the post-Budget rally in the stock market. Within three trading days after the Budget, the benchmark index of the Bombay Stock Exchange (BSE), or Sensex, surged by 750 points. The government has earmarked a revenue of Rs 400 billion (Rs 40,000 crore) from hiving off its stake in public sector undertakings (PSUs). Though the Budget speech is silent on the list of such undertakings, still, the major companies that could be put up of sale are Steel Authority of India Ltd (SAIL), Coal India, Engineers India and the much awaited BSNL. In the current fiscal, the government is planning to off-load equity of iron major NMDC and Sutlej Power to complete the target of Rs 25,000 crore (Rs 250 billion).

A target of Rs 400 billion from disinvestment is definitely ambitious. The government is pinning hopes on the sale of public sector stake to come to its rescue to curb fiscal deficit. But, market volatility and active retail participation along with inflows from foreign institution investors (FIIs) are critical factors that would come into play. The recent lacklustre performance of the NTPC (National Thermal Power Corporation) and REC (Rural Electrification Corporation) issues has already raised serious doubts about the interest of retail investors for public sector equity.

The NTPC follow-on public offer (FPO) that was supposed to flag-off the divestment programme got a tepid response from the investor community. The government was divesting a 5 per cent stake in the power company. It reserved one-third of bids for common investors but, in turn, received a bare 0.16 times subscription from retail investors at a floor price of Rs 201. Even overseas investors shunned the NTPC and REC issues due to the bidding process adopted by the government. The government sold shares using the ‘French auction’ method, where investors could bid any price above the floor price set for the share sale.

Thus, pricing of the issue and the nature of the auction process are vital to the success of forthcoming issues. Take the case of the NTPC fiasco. Even though the price for retail investors was set at a 5 per cent discount to the prevailing market rate, it was not attractive enough to pull retail investors to park their money for three weeks for listing gains. Moreover, by the time the issue opened, the discount disappeared as the share price dropped by more than 10 per cent between 5 January 2010 and 3 February 2010. Pricing worries also clogged the REC issue as well. Even though the FPO was bailed out by domestic institutions, the retail segment remained undersubscribed with bids received for only 13.8 million shares, against nearly 60 million shares on offer. The stock of REC was trading close to the issue price of Rs 203 on the opening day of subscription.

Unless the government offers a significant discount of 10-15 per cent to retail segment, subsequent offers will remain at the mercy of institutional investors. However, in an order issued in October last year, market regulator SEBI (Securities and Exchange Board of India) stipulated institutional investors to bid for public offers at a price above the floor price. In a conventional book-building process, an investor can change the bid price at any point of time. Institutional investors did not like the restriction imposed on them to re-price their bids and so stayed away from both the issues. Providing flexibility in the bidding process and calibrating the price of an issue in line with market value would aid the government to meet its target.

Indiabiznews, March 06, 2010