The summer of 2003. The Sensex is still in stupor, refusing to rise any higher from the 3000 mark, occasionally dipping below it. That’s just 23% of its current value. The one excitement in the air is the news of the Maruti Udyog IPO, the government of India’s first big bold privatisation move. The dribbles of disinvestments in the past have neither made companies nor the shareholders richer. The big question is, how much the government will ask for a share of Maruti? Some of the biggest financial wizards in the country are convinced the issue will bomb if it is priced above Rs 100 (face value Rs 5).
The skepticism turns to a near doomsday forecast when the floor price of the issue is decided to be Rs 115. Suzuki Corp has agreed to underwrite the issue — just in case. When the issue finally opened in June it is oversubscribed 10.68 times. At the final offer price of Rs 125, share is listed at Rs 165—a gain of 32% in 15 days. In years to come investors will call the Maruti IPO the bellwether that propelled the stock markets into their biggest and longest unbroken journey of wealth creation.
These could well be the notes from the diary of an official in the Disinvestment Ministry circa 2003. The Sensex shot up 13.4% in June 2003. It crossed 4000 in August and in November of the same year, mount 5000 was scaled.
All through PSU stocks were powering the boom and outperforming the Sensex. A Maruti share today is priced at over Rs 900. “The investors were convinced that government was serious about unlocking the wealth for people through privatisation,” says Arun Shourie, who as minister for disinvestment in the NDA regime spearheaded India’s most successful privatisation programme.
In retrospect, June 2003 was the first privatisation propeller. The second one came in February-March 2004 when PSU stocks worth over Rs 15,000 crore were sold. Such large-scale supply of quality stocks brought in both foreign investors and Indian retail investors into the market in hordes. In the pre-privatisation era, government had squandered small percentage of its companies’ stocks at PE ratios between 2 and 4 (the price it got was between 2 and 4 times the earnings per share).
During privatisation, the PE ratio was between 11 and 89. The UPA Government has virtually banned privatisation. Even faint attempts at selling minuscule proportions of shares in BHEL and Shipping Corporation of India have been halted. That means among other things, no more supply of good government stocks, some of which may not remain good for long. Instead of leading the Sensex, PSU stocks are now trailing it (see chart). The extent to which the government can enrich itself and the investors through a bold privatisation plan is mindboggling. By the time the NDA government was voted out in 2004, it had raised about Rs 40,000 crore by selling just 1.5% of government stake in PSUs (including strategic sales). It had created much larger wealth for investors — and that when Sensex was below 6000.