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How to create wealth through disinvestment

The offer should only be to retail investors, and at reasonable prices. This would ensure that the wealth created by public enterprises through domestic public resources is shared rightfully only with the public.

Prithvi Haldea | Print Edition: December 13, 2009

It is heartening that the government has yet again reaffirmed its intentions of making public offers of public sector units (PSUs). Seventeen of the 46 listed PSUs would be required to make a follow-on public offer (FPO) with a collective offer size of nearly Rs 30,000 crore. In addition, at least 35 initial public offerings (IPOs) can be expected out of the 102 profit-making PSUs.

Given the multi-dimensional benefits accruing from listing, also resulting in better performance of the PSUs, divestments should happen. It would require a pragmatic and a radical new approach, which will also entail a relaxed regulatory framework.

To begin with, the government should not wait for an “opportune time” to maximize its gains. Private promoters can be greedy, government should not be. Even if it is looking for gains, it should realise that substantive gains would accrue to it post-listing. In the four PSU IPOs (NTPC, PFC, PGCand REC) during the past five fiscal years, the value of the government holding has gone up nearly three times from Rs 80,791 crore on the issue date to Rs 2,36,115 crore as on November 13, despite the significant correction in the market from its peak. To ensure implementation, the list of PSUs can be drawn up in an alphabetical order or in a descending order by size of company. The issuances should be staggered, learning from the fiasco of 2004.

Then the offer should only be to retail investors, and at reasonable prices. In this manner, the wealth created by public enterprises through domestic public resources shall be shared rightfully only with the public. Also, this policy would be politically correct; what better opportunity to please millions! This approach would mobilise the household savings of millions of retail investors. An only-retail policy will also ensure a very wide distribution, reducing post-listing selling pressures.

Government paper offers to the retail investors the ‘safety of capital’ that they want given the high credentials of PSUs. The retail market has depth as well given the experience of the recent past. The Reliance Power IPO could attract as many as 46.23 lakh retail investors who collectively put in a Rs 39,919 crore as advance application money in just five days. If retail-only approach is adopted, the government, should then

  • Use only the fixed price route as retail investors are illequipped to participate in bookbuilding.
  • Ensure a wide distribution, with no individual getting more than Rs 1 lakh in allotment.
  • Incentivise the distribution system to enthuse merchant bankers/brokers etc., to reach out to first-time investors.
  • Allow allotments in physical mode: Investors would be saved from the hassles of opening demat accounts and from custodial charges. Only for selling, demat account may be mandated.

If, however, the government goes ahead with the existing institutional reservation, it should at least offer a discount (10-15 per cent) to retail investors. It is hoped that for FPOs, the optional route recently announced by the Securities and Exchange Board of India shall be adopted by the PSUs. This would be good news for retail investors as the allotment to them would be at the floor price (while institutional investors would pay a higher price in the auction).

If the disinvestment process is managed properly it can go a long way in truly spreading the equity cult in India.

Prithvi Haldea is Chairman & Managing Director, Prime Database

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