Disinvestment in CPSEs-A Critique-Post 2009
By Ms. Sangita Choure, IA&AS, Joint Secretary, Dept. Of Disinvestment, Ministry of Finance GoI
The objective of the GoI Disinvestment Policy is to unlock the true value of the Central Public Sector Enterprises (CPSEs) for all stakeholders and encourage people's ownership in our State run Companies. The purpose behind listing of Companies is to encourage transparency and accountability in their functioning thereby ensuring Good Corporate Governance norms. One of the important constituents of the Government's current disinvestment policy is to retain at least 51 per cent equity and management control in all cases of disinvestment in profitable CPSEs.
1. Brief Recap of the Disinvestment programme since 2009
The Department of Disinvestment (DoD) which implements the GoI Disinvestment policy and programme have successfully disinvested Government's equity in several CPSEs either by an Initial Public Offering (IPO) or Further Public Offerings (FPO). Some of the CPSEs in which Government have disinvested its equity since 2009 onwards through minority stake sales of shares are REC,NHPC, NMDC, NTPC, OIL, ONGC, NALCO,NBCC to name the important stake sales. During the period 2009-10 to 2012-13 Government realized the following disinvestment receipts which are in the nature of "Non Debt Capital Receipts" under the Government Budget/Accounting nomenclature:
(₹ in crore)
In addition, in 2012-13 and 2013-14, those listed CPSEs which were not having 10 per cent of their shares with the public, were made compliant to the public shareholding norms under the Securities Contract (Regulations) Rules (SCRR), by offloading of minimum ten per cent equity to the public, before the SEBI set deadline of August 08, 2013. The CPSEs which were made SCRR compliant were MMTC (Minerals and Metals Trading Corporation), RCF (Rashtriya Chemicals and Fertilizers), Hindustan Copper, NFL (National Fertlisers), STC (State Trading Corporation) and ITDC (India Tourism Development Corporation)
The Government sets budgetary targets for disinvestment receipts. Though an Internal Action Plan is drawn up in DoD , the achievement of these targets is subject to concurrence/cooperation of all the concerned Administrative Ministries and more important the prevailing market conditions in general and specifically for the particular stock - for timing the divestment transaction.
2. Valuation of Shares
In the sale of Government equity the crux of the issue is the valuation of the share of the CPSE. As the sales are done in the capital markets which are ever unpredictable and volatile, it poses a great challenge, balancing the twin requirements of ensuring the best return for the seller that is the Government and an attractive price for the Investor in order to ensure a successful sale.
It has been observed that as soon as the market receives the information of a disinvestment issue the hammering of the stock commences. While some reduction in the traded price is normal, because of the additional 5-10 per cent liquidity which would be infused with the forthcoming stake sale, a substantial reduction of say more than 25 per cent drop in the share price due to the sale announcement erodes the market cap of the Company and adversely affects the valuation/fixation of the floor price for the sale.
Our interaction with the market players leads to an inference that the hammering of the stock is with the primary objective of making short term quick profits, by way of shorting/arbitrage transactions both in the cash and futures markets, on the expectations that that Government may sell the stock cheap to meet its budgetary requirements. This perception of cheap sales is not correct as the Government is not desperate to do distress sales to meet its targets and very often many a transaction have been postponed for better valuations/timings.
2.1 Is the market always a correct indicator for the investors about the intrinsic value of a company's share? The point is that investors especially the "long" ones would be better off taking by taking informed decisions on their investments, guided by the company's financial fundamentals and its growth story and not necessarily the stock market prices for valuations.
We find that the shares of Maharatna and Navratna companies are traded at much lower levels than their peers in the private sector. The market seems to have separate set of perceptions about CPSE stocks, which defy logical reasoning. An example is that of Steel Authority of India Ltd. (SAIL), which is India's largest steel producer and is the world's 21st largest (source: IISI). It commands almost 1/5th of the domestic market share with its 14 Millions Tons Per Annum (MTPA) capacity. It was seen that while SAIL's scrip was trading at ₹ 47-51/- per share (Book Value (BV) ₹ 99/March 2013- ), Tata Steel, world's 12th and India's largest private sector steel company with a capacity of 24 m tons was trading at ₹ 283/- ₹ 287/-(BV ₹ 568/-) (September 2013. figures). This disparity in share prices continues. There are similar such instances of under-valuations of CPSE shares across sectors.
Further, around the time in March 2013, when the Government was planning for the Rashtriya Chemical fertilizers, offer for sale (OFS), some private companies OFS were also being done in the markets. Whereas the market received a Holiday Resort Company's shares positively at a valuation of ₹ 270/- (BV ₹ 72/ approx) , the RCF share, a fertilizer stock, at a floor price of ₹ 45/- (BV ₹ 42/-) was perceived to be overvalued and did not receive the expected response from investors, who found the fertilizer sector unattractive.
In cases of illiquid stocks or those with insufficient public float also, the market price is not always the true indicator of the share price. The divestments of MMTC and ITDC done by the Government in June/July 2013, to make the CPSEs compliant to public shareholding norms, are instances of valuations which were done taking into account the intrinsic value of the Companies rather than the inflated market prices which were on account of speculative trades in these Companies.
3. Investor Response
Foreign Institutional Investors (FIIs) : Despite adverse domestic perceptions on CPSEs and the valuation of their shares, the Government has managed to get sizeable participation of almost 35 to 60 per cent of the total deal size from Foreign Institutional Investors in some of the CPSEs divested in the Oil, Power and Mineral and Metal sectors. The funds based out of South East Asia, London and the USA find the CPSEs operating in key sectors promising stocks for their investments.
Mutual Funds : The long term investors like Mutual Funds are cautious players when taking a call in equity investments. They look at profitable companies with very good dividend paying track records and promising growth potentials. The highest participations we have got from them were in Oil India and NMDC OFS where they got allocations ranging from 19-23 per cent.The MFs could be more open to investing in CPSEs which are operating in important sectors of the economy and whose business is here to stay supported by Government policies in that Sector.
Participation of LIC in the Disinvestment Programme : LIC is the biggest financial institution of the country which invests with a long term view in the capital markets in both public and private sector shares. They have the single largest budget for Investments based on their annual surplus income. The oft heard criticism is that Government is divesting with one hand and taking it back with the other hand and is this Divestment? Criticism about LIC's participation in disinvestment programme is too general and unfounded. The LIC takes its own investment decisions. In case of CPSEs like OIL, NTPC and NMDC the life insurer's participation ranged only from 2 to 25 per cent, whereas in OFS of NALCO, SAIL and HCL/RCF/MMTC done in 2012-14 (March) its participation was in the range of 50-57 per cent of the issue size. Being a long term investor, the LIC has gained on most of its investments in CPSEs- the ONGC OFS being the most recent example, where the OFS which was done in February, 2012 for a floor price of ₹ 290/- at a small premium above the then traded price, was trading at ₹ 340 to 320/- since January to July 2013 and was at a peak of ₹ 400/- in October 2014 before sliding down for fundamental reasons relating to international crude prices.
At the end of the day LIC would continue to be an Anchor Investor for the Govt's Divestment Programme. Other long term investors could also take a cue from LIC's participation and participate in the divestment programme rather than criticizing LIC's faith in the public sector stocks.
Retail Investors Participation : The OFS of CPSEs done in 2012-13, have also received positive participation from retail investors ranging from 17.65 per cent in NMDC, 13.4 per cent in Hindustan Copper, 14 per cent in MMTC and 7 to 8 per cent in Oil India, NTPC and RCF OFS. The SAIL OFS done in December 2014 received almost two and a half times oversubscription from retail investors, for the 10 per cent allocation reserved for them. The EIL FPO and the CPSE –ETF which were launched in Feb/March 2014, also received a thumping response from retail investors and were oversubscribed.
In keeping with the Divestment Policy which encourages people's participation in the ownership of CPSEs, the Government had requested SEBI to make the OFS mechanism more retail friendly. Accordingly, the SEBI have recently further modified the OFS guidelines on August 8 2014, whereby a separate 10 per cent minimum reservation has been made in the OFS method for the Retail Investors. Government intends to further increase the retail participation in the ownership of CPSEs by giving more than 10 per cent reservation to the retail investors. With some of the best CPSE stocks up for sale in the divestment programme of minority stake sales, it is expected that this measure will attract retail investors to take part in the share sales of CPSEs via the OFS mode. This will in turn be a positive step to revive the equity markets in particular and give a boost to the capital markets in general. The SAIL OFS which was done recently on 5th December saw a thumping response from Retail Investors and the entire 10 per cent allocation to them was oversubscribed 2.5 times.
Conclusion : This summarizes in brief, the implementation of the Government divestment programme relating to stake sales in CPSEs since 2009, and its achievements despite the challenges and criticisms. The message is that the People's ownership in our CPSEs needs to be further encouraged by more divestments, whereby good governance will be brought in by virtue of transparency and accountability to shareholders. Widening of the public shareholding will also ensure that Govt does not take CPSEs for granted and look upon them only as resource raising machines but rather strive to improve the business efficiencies and give capable and best of management to these companies. Greater Autonomy will unlock the potential of our CPSEs and their market capitalisation would with these encouraging measures, far surpass those of their private sector peers. To the Investors the lessons are that the market price of a share is not always the correct indicator of the intrinsic value of a Company and investors would be better off by taking their decisions based on the financial parameters and fundamentals of business of a Company combined with its growth potential and stay put by taking a long view on their investments in CPSEs.