BackMark to Market | Issue pricing key to PSU disinvestment
Getting the price right for one issue will generate a positive buzz for subsequent ones
Premium(Priyanka Parashar/Mint)
The government has approved a number of divestment proposals, most of which involve metal-sector companies. The government’s track record in this regard has been poor, either due to wrong pricing, wrong timing, or failing to assure investors (in the case of oil firms) that these companies have operational autonomy.
So, has the government got the building blocks in place for a successful divestment this time? A key factor is foreign investor interest. The recent announcements by the US Federal Reserve and the European Central Bank have reassured foreign investors and resulted in equities rising across key world markets. That is a good omen, but it needs to sustain.
India did its bit to dazzle investors by cutting fuel subsidies and allowing foreign direct investment (FDI) in retail and aviation. Investors have taken it positively, but they will want to see if allies force a roll-back. A U-turn will spell bad news for disinvestment.
The actual timing of these issues is critical too. In the capital markets, money is best raised when conditions are good and not necessarily when it is needed. Here, the promoter (the government) is looking to sell its stake, and the companies are not raising money for a project. There is no story to be sold.
If one looks at fundamentals, this is possibly the worst time to be selling stakes in metal companies. The BSE metals index is down by 15% from a year ago, while the benchmark Sensex is up by 9%. The past week has seen them rise, along with the broad market. The reasons are slowing global economic growth, translating to weak demand for commodities, falling metal prices and the rising cost of servicing debt.
The June quarter saw the financial performance of both ferrous and non-ferrous metal producers under pressure. But the government does not have the luxury of timing, as it needs the money in its kitty before the fiscal ends on 31 March. The disinvestment of the metal companies—Steel Authority of India Ltd, Hindustan Copper Ltd and National Aluminium Co. Ltd—will fetch about 7,800 crore at current prices. If we include others such as MMTC Ltd and Oil India Ltd, it increases to 18,000 crore.
If fundamentals are poor, global liquidity has just begun to improve, and the domestic picture still looks uncertain, it may seem like bad timing to sell a large parcel of equities. The government may get lucky if equities rise significantly by the time these issues actually hit the market. That is unpredictable.
But what is more certain is that success of any equity issue, including disinvestments, depends on getting the issue pricing right. Setting too low a discount has backfired in the past. The government should perhaps concern itself more with the total amount being raised, rather than the discount it considers acceptable.
A substantial discount may seem illogical, but so does selling large parcels of equity in these times. Investors will have an incentive to subscribe if the discount is tantalizing; and if equity prices fall post-issue closure as they often do, investors have a higher margin of safety. If the government gets its act right for one issue, it will generate a positive buzz for the subsequent ones.
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