Hold back the ONGC FPO

Indeed,disinvestments in public sector firms have in general been a good idea and,with the benefit of hindsight,have probably worked better than privatisation might have. The government,which continues to hold a majority stake in many of the companies,has become richer over the years but small investors have made money too. Between 2001 and now,for a clutch of 32 PSUs,the market capitalisation rose 750% while the Sensex returned 433%. In the same time,the market capitalisation of 13 banks rose 1,230%. For a sample of 44 PSUs,the market capitalisation has more than doubled in the last six years from R4.21 lakh crore in June 2005 to R8.67 lakh crore in June 2011. In the case of public sectors banks,the returns have been even more impressive; for a sample of 21 banks,the market capitalisation has trebled from R1.2 lakh crore to R3.6 lakh crore.

True,not everything has always gone right and there have been some miscalculations along the way. For instance,the R8,286-crore NTPC follow-on issue had to be bailed out by LIC and SBI; the French auction method that disallows institutional investors from retracting a bid simply didn’t work and a 5% discount for retail investors wasn’t enough money left on the table at a time when the markets were volatile. In fact,although small investors typically take a cue from what their institutional counterparts are doing,they weren’t fooled. The NMDC follow-on issue,too,was a bit of a flop,again bailed out by LIC. The government should have realised that the stock is an illiquid one and left more money on the table for small investors; the price today is R250 whereas the issue price was R300. In fact,with the markets in bad shape,shareholders have been continuing to lose money of late. Of the dozen stake sales of PSUs in the past two years,most are trading below their issue prices. Clearly,many of them were mispriced.

In all this gloom,the thundering success of CIL,the country’s biggest IPO,which fetched the government around R15,000 crore,is evidence that PSUs can make for good investments if rightly priced. Even now,the CIL stock trades at well above its issue price of R245. Of course,there was some novelty value but nonetheless it was the pricing that did the trick. Again,it’s somewhat easier to price an IPO rather than an FPO because when a stock is already listed,investors tend to sell it down in the hope of getting fresh stock at a lower price; the overhang of new shares coming into the market and expanding the equity base also has an adverse impact on the price.

The government’s predicament is understandable. Last year,it had set itself a disinvestment target of R40,000 crore but managed to collect just around R22,500 crore. This year too,the government wants to mop up a similar amount but has so far managed a paltry R1,200 from the sale of shares of Power Grid Corporation. Nonetheless,given the mood in the market,it might be advisable to stay away until fund managers are more confident that the drift in government has been arrested. If the issue flops,it could queer the pitch for other issues that will follow,including those of IOC or SAIL. And if that happens,the government will not be able to mop up even half of what it did last year.

shobhana.subramanian@expressindia.com