After some hiccups, the public sector disinvestment programme got off to a start in late November. The government raised some Rs.800 crore by divesting a 5.58 per cent stake in Hindustan Copper Ltd. through an offer for sale (OFS) through the stock exchanges (OFS). The government’s shareholding in the company before the OFS was at a high 99 per cent.

The budget has fixed a Rs.30,000 crore target from the public sector disinvestment programme for the current year (2012-13). Obviously, offer for sale in Hindustan Copper is only the beginning and the government’s expectation is that the small equity stake sale will be the harbinger of larger issues and higher realisations.

A confident Finance Minister believes that the budget target of Rs.30,000 crore will be achieved even though hardly four months remain before the year-end. The macro-economic target is to contain the fiscal deficit to within 5.3 per cent of the gross domestic product (GDP). With the slowdown being all too pervasive, during the second quarter of this year, the economy grew by just 5.3 per cent, achieving the target becomes especially difficult as revenue targets are unlikely to be met. This raises the expectation from the divestment programme.

According to reports, a number of other companies are being lined up. In brief, the government thinks that there is a momentum, which will be have to be seized.

The government’s optimism is also based on the fact that, so far at least, and unlike most cases of PSE divestment in the past, there has been no major controversy in this case.

It is, however, naive to think that everything is hunky dory.

Hindustan Copper’s stake sale found favour only because it was the first during this year, which, by all accounts, has hardly been favourable for such sale. The primary issue (IPO) market has been in a moribund state for a long time. Two other PSE’s which were being prepared for divestment pulled off because of a realisation that they may not fetch a “fair” price. Pricing decisions have been at the centre of major controversies in the past.

Barely a week after the stake sale, Hindustan Copper’s issue has come under scrutiny for the following reasons:

(1) The offer for sale might, according to some newspaper headlines, have “sailed through” but the fact is that the bulk of the subscriptions came from the government-owned LIC and State Bank of India and other public sector banks. Investor responses, whether from the foreign institutional investors or domestic ones, have been extremely muted.

The government has obviously leaned on these institutions to support Hindustan Copper. There is ample confirmation of this from the fact that LIC, India’s biggest investor with an investment target for this year alone being at a mind boggling Rs.2.4 lakh crore of which 10-15 per cent will be in equities, had its investment guidelines relaxed just in time to enable it to invest on such a large scale.

The temptation to divert a portion of that money to a “just cause” would always be there but to do so is a mockery of LIC’s autonomy. Barely a week before the offer for sale of Hindustan Copper, the government allowed LIC to raise its investment limit in any one company to 30 per cent of the (latter’s) paid-up capital, a move obviously intended to support the OFS. In the process, the government overruled the regulator, the Insurance Regulatory and Development Authority (IRDA), which was not in favour of the relaxation.

It is not for the first time that LIC has been asked to bail out the public sector disinvestment programme. In March last year, it was asked to invest in a big way in ONGC’s share issue.

Since the current market price is way below the price at which it invested, LIC is incurring a big loss on that investment. Early reports are that it will not fare any better with Hindustan Copper.

The message

The message is clear: what is good for the government’s disinvestment programme can be positively injurious to LIC’s policyholders.

(2) The pricing of the OFS has been flawed. The government fixed the base price at Rs.155 a share, which seemed to be at a steep (42 per cent) discount to the pre-issue ruling price.

But the government was not really offering a discount. The share price was not arrived at scientifically. Only a very small quantity of Hindustan Copper’s shares were traded before the offer (less than one per cent), a miniscule float lends itself to manipulative practices especially if a bigger float is in the offing. In the event, the share price fell sharply on the BSE on November 23. Existing shareholders would have taken a beating. If the trend continues, the possibility of new investors — LIC and other government owned institutions — losing money is all too real.

(3) The Hindustan Copper OFS does not meet the canons of a sound disinvestment. According to the official website of the Department of Disinvestment, Ministry of Finance, every citizen has the right to own part of the shares of public sector undertakings, “which are really the wealth of the nation”. Such wealth should vest with the public. In every case, the government will retain at least 51 per cent of the shareholding and management control of the undertaking.

(4) Implicit in the above is the role of the small shareholder. Far from getting primacy, he has once again been ignored in a public sector divestment programme.

In fact, earlier this year, the Securities and Exchange Board of India (SEBI) authorised two new methods for divesting shares — the Institutional Placement Programme (IPP) and Offer for Sale of shares through the stock exchanges (OFS). Both these are meant to simplify the process of public issue, reduce its time-frame and hopefully the expenses connected with the issue. Although to be welcomed for the above reasons, both the methods bypass the retail investor. The OFS of Hindustan Copper reinforces that point.

narasimhan.crl@thehindu.co.in

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