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Public sector stake sales open up more investment avenues

At present, 35 per cent of the shares in IPOs and FPOs are reserved for retail investors up to a cap of Rs 2 lakh.

Written by Surabhi | Updated: September 15, 2014 2:40:05 am
A man looks at a screen across the road displaying the election results on the facade of the Bombay Stock Exchange (BSE) building in Mumbai May 16, 2014. (Source: Reuters photo) A man looks at a screen across the road displaying the election results on the facade of the Bombay Stock Exchange (BSE) building in Mumbai May 16, 2014. (Source: Reuters photo)

With stock markets on a roll, equity investments have regained their lustre. As an added bonus, investors keen to invest in the markets will also have a plethora of stocks of public sector units to choose from.While approvals for a few disinvestment issues were already in place, the government also opened the gates for three big ticket stake sales with the Cabinet Committee on Economic Affairs on September 10 approving disinvestment in Coal India, Oil and Natural Gas Corporation and NHPC. Proposals for stake sales in a few more PSUs are expected to be approved over the next few weeks.

The first issue — a 5 per cent disinvestment in Steel Authority of India Ltd (SAIL)— is likely to take place later this month. “We are focussing on stake sales in about eight to nine PSUs this fiscal. The objective is that not only will it help raise funds for the government to fund the fiscal deficit but will also benefit the public which can invest in these companies,” said a senior official from the department of disinvestment (DoD).

Additionally, for retail investors, there are also options such as the exchange traded funds of public sector units as well as planned residual stake sales in Balco and Hindustan Zinc, the modalities of which are still being finalised.

While the Bombay Stock Exchange Sensex has jumped up by over 4,500 points since May 1 this year to cross 27,000 points, the Nifty too saw a record high of 8,500 points.

Disinvestment – what it holds for the retail investors:

The government is always keen to encourage retail participation in disinvestment issues as it believes that it is a way to ensure public ownership of public assets. Analysts too agree that public sector firms, on the whole, are a good bet to invest in given their stable nature and government backing. But they warn that pricing of the scrip is crucial.

“For PSU stocks, pricing is the main issue. So retail investors need to watch out for when the issue takes place and what it is priced at. Usually, there is a discount for retail investors as well, which helps make the valuation attractive,” said Vinod Nair, head-fundamental research, Geojit BNP Paribas Financial Services. Apart from the big ticket divestment issues, the year is also significant as the government plans to change its divestment strategy a bit and focus more on the offer for sale route.

As of now, only two stake sales are planned through initial public offers while the remaining are through the OFS route. “There is less paperwork required in terms of filing and so it is an easier way to disinvest,” said a second official from DoD.

Now, to attract retail investors to this method, market regulator Sebi has also reserved at least 10 per cent of the shares in the OFS for such investors bidding for up to Rs 2 lakh. The DoD has the freedom to increase the quota for retail investors. “10 per cent is the minimum reservation. This can be increased to even 20 per cent based on the government’s discretion. So it will remove the discrimination against retail investors,” explained the official.

At present, 35 per cent of the shares in IPOs and FPOs are reserved for retail investors up to a cap of Rs 2 lakh. Additionally, there will also be at least a 5 per cent discount on the floor price for retail investors.Experts say that the OFS mechanism will not be too much of a change but investors should still read up a bit.

“It is in electronic form as compared to the FPO which uses the traditional way of manual forms. So retail investors should ideally make themselves familiar with the process,” said Jagannadham Thunuguntla, Head of Research, SMC Global Securities.

PSUs for Disinvestment:

Rasthriya Ispat Nigam Ltd: As the name suggests, RINL is a steel PSU and is the corporate entity of the Vishakhapatnam Steel Plant. This is one of the two firms that are slated for an initial public offering this fiscal. The Centre plans to sell 10 per cent stake in the firm for which CCEA approval is already in place.

Hindustan Aeronautics Ltd (HAL): A defence sector PSU, the government plans to list it on the bourses with an IPO. 10 per cent government equity will be divested in the firm. While the stake sale is scheduled for 2014-15, it could take some time as requisite number of independent directors on its board are being appointed.

SAIL: A maharatna PSU, the Centre plans to offload 5 per cent stake in the firm through the offer for sale (OFS) mechanism. All approvals are in place and the government along with merchant bankers has already started road shows for the stake sale that could raise over Rs 1,700 crore.

COAL INDIA LTD: Yet another maharatna PSU, this will be the big-ticket disinvestment this fiscal that could raise over Rs 23,000 crore. The government plans to sell 10 per cent stake in the firm, which is the largest coal mining company in the country, through OFS. A protest strike by the coal workers’ unions is impending but the government says it is firm on going ahead with the disinvestment.

ONGC Ltd: This too, is a maharatna firm. A 5 per cent stake sale through the auction (or OFS) route is planned in the state-owned oil explorer that is estimated to fetch over Rs 18,000 crore. Falling global crude oil prices and the proposed deregulation of diesel prices could further boost its balancesheet.

NHPC LTD: The government plans to sell 11.36 per cent of its equity in the power PSU through the auction method and could raise over Rs 2,800 crore. A mini-ratna category-I enterprise, power sector reforms and an uptick in industrial activity could add to its attractiveness.

Rural Electrification Corporation (REC) Ltd: While CCEA approval for the disinvestment is yet to be taken, the Centre plans to sell 5 per cent stake in the navratna power financer through the OFS route. Categorised as an infrastructure finance company (IFC),the government is currently appointing merchant bankers and legal advisors for the transaction that is estimated to raise Rs 1,300 crore.

Power Finance Corporation (PFC) Ltd: The government plans to sell 5 per cent stake in PFC as well and is in the midst of appointing merchant bankers and legal advisors for the stake sale. It is also an infrastructure finance company, working in the power sector which could raise 1,700 crore through the share sale.

Exchange Traded Fund of CPSE Stocks: For those investors who wish to keep their exposure to the equity markets limited, the PSU-ETF too, is a good option to consider. While the department of disinvestment is still working out options for the CPSE-ETF, there will surely be a sequel to the instrument this fiscal.

The BSE-PSU index has risen by over 14 per cent since April 3 when the ETF was launched.One option with the finance ministry is to continue with the fund launched last year. It consists of 10 PSU stocks including ONGC, CIL, GAIL, REC, PFC, Indian Oil, Container Corp, Oil India, Bharat Electronics and EIL. The other option being weighed in by the ministry is to launch a new ETF that would include shares of SUUTI that holds 11.66 per cent stake in Axis Bank, 11.77 per cent in ITC and 8.18 per cent in Larsen& Toubro. Since all three are heavily traded stocks, setting up an ETF is considered a good plan.

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