In January this year, the government divested 10 per cent stake in Coal India Limited through the offer-for-sale (OFS) route at Rs 358 per share and brought its holding down to 79.65 per cent. Ten months later, on Wednesday, the Cabinet Committee on Economic Affairs approved an additional 10 per cent divestment of government’s stake in the company.
However, in the last ten months since the last OFS of CIL was conducted, shares of the company have lost almost 6.5 per cent. On Wednesday closed at Rs 334.95 per share, making subscribers of the previous OFS the net losers.
Experts say that while the share sale makes sense for large institutional investors, looking to pick a notable stake in a company (as the shares are being made available in bulk), retail investors who participated in the previous OFS of the company and are still holding on to those shares may not be enthused to participate.
According to market experts, following the Cabinet’s decision to divest 10 per cent in CIL, the share price may remain weak as has been the case with such issues in the past. Also, the prevailing market conditions may keep the stocks under pressure and therefore calls for a proper due diligence before one can invest. On Thursday, a day after the CCEA approval, while the benchmark Sensex at the Bombay Stock Exchange was up by 1.4 per cent, share price of Coal India was down 0.4 per cent. The only benefit that one might look to capitalise on is the discount in the offer price.
The government might offer a discount to retail investors on the offer price (to be decided a few days before the OFS) and some say that retail investors should look to benefit from the issue and if one is entering as a long-term investor then the basis should be the fundamental of the company and the sector.
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The frequency of disinvestment
While the sell-off process does not lead to any changes in the capital with CIL or its ownership status, some say that frequent disinvestment in a company impacts the pricing of the firm. While the government has approved the fresh stake sale process in CIL within just 10 months of its earlier divestment move in January 2015, there have been other such examples too. In Hindustan Copper, the government had divested its holding twice in a matter of eight months between November 2012 and July 2013. Similarly, in Steel Authority of India Limited, the government divested its stake twice in a period of 20 months between March 2013 and December 2014.
“Long-term investors in CIL have expressed their concern over frequent disinvestment as it impacts the stock price of the company. Ideally, you should give time to the stock to recover,” a government official said.
Several experts have also raised concerns over the method of disinvestment adopted by the government. Even as the Centre looks to provide both institutional and retail investors with an opportunity to buy the stocks through OFS, experts say that the government should rather divest through a closed auction process.
“I am fundamentally against this method of sale. They can do a closed auction for interested institutional investors and sell the desired stake. When you opt for the OFS route, your offer price is competing against your own market price and you are always hoping that the market remains strong so that the market price of the stock is trading above the offer price. If for some reason the market falls just ahead of the issue date then either you will have to call-off the issue or it may not get subscribed and fail,” said Prithvi Haldea, founder and chairman of Prime Database.
If they do a closed auction then the market price of the stock is irrelevant and the government can be more assured of the success of the issue.
How retail investors should proceed
Experts say that retail investors should be very careful while planning to participate in a stock when the government is divesting its stake. In a bull market, a disinvestment may throw up the opportunity to subscribe to a good stock at a discount of around 5 per cent (generally offered to retail investors by the government) and therefore there are gains to be had after the issue.
“There would be a 5 per cent discount in pricing for retail investors and that is what they should look to pocket,” said SP Tulsian, an independent investment advisor.
However, if market conditions are weak then the issue may not get subscribed and the investor may suffer loss on the investment. While global stock markets are trading weak, the concerns surrounding a hike in interest rates by the US Federal Reserve in December may also pose threat to the markets and thus impact the success of the forthcoming disinvestments.
Market participants say that investors should look at disinvestments as trading in the secondary market because the company is already listed and the share price is driven by the existing fundamentals. Only if the fundamentals of the company are strong and the stock is available at a good price, investors should invest for long-term.
Investors should, however, be extra cautious while picking up shares in a company at a discount as it is always better to avoid firms operating in sectors that need major reforms or are facing environmental issues. It is wiser to wait till the time the issues are resolved.