Divestment is a key method of raising resources for the Government and the target for the current year is Rs 40,000 crs. The amount raised so far is just about Rs 1,150 crs and the shortfall of Rs 38,850 crs is yet to be raised. The statements coming from the ministry is that the divestment programme is on track and the finance ministry is confident that the target would be met.
Recent reports in the media and statements from some of the PSU’s talk of various options by which the money would be raised. The preferred way so far was by way of public issue or by way of an FPO (Follow on Public Offer) where the company was already listed. The government to induce retail investors to participate gave a discount to retail applicants and employees of roughly 5%.
Things started going wrong when on the eve of the ONGC issue the same was deferred. ONGC was to have its roadshow from Monday the 19th of September 2011 and the issue was to open on Tuesday the 20th of September. Late on Thursday the 15th of September evening, the divestment ministry decided to defer the issue and the reason cited subsequently was poor market conditions. The BSESENSEX at that time was around the 17,000 mark and if one were to ignore the sharp upmove last week we would be around the 16,000 mark.(Last week markets gained 1,151 points to close at 16,846 points)
This move was a big setback and people started wondering whether any further divestment would happen. One then heard of various ways of raising money such as buyback of shares by cash rich PSU’s and the possibility of whether only the promoter’s shares could be bought back. No such provision exists but things can be conveniently modified. Even if it’s a general buyback the same would be on a pro-rata basis and with the government holding the majority, more shares of the government would be accepted than any other category. Secondly existing shareholders would not like to sell at current rates which are quite depressed. The next suggestion being talked about is cross holding of shares where one company buys shares of another company. We already have examples in the oil companies where IOC holds shares of ONGC and vice versa. In this case these shares would be bought by these companies from the government and the surplus cash of these companies would turn into investments. Once such a move is done, valuations of these companies would take a beating as the performance ratios would deteriorate and there would be de-rating of these stocks by financial analysts and would therefore become a self-defeating purpose.
In the past the government has fallen time and again on cash rich LIC for support of its divestment programme. One is worried that this year once again in the last fortnight of March 2012 one would find that the government turns to LIC for help and support. All this is fine for discussion but is there a solution?
This writer proposes a solution that when LIC is to turn a saviour in any case why not make it an underwriter of the shares to be offered at a floor price and do an auction of shares on the exchange. My proposal is simple, virtually instantaneous and to a large extent does not destabilise the share price. Let us for example take the case of ONGC. The closing price of the stock is Rs 268 on the BSE as of Friday the 2nd of December. The government decides to sell say 40 crs shares with the floor price as Rs 260. There would be an advertisement in the papers on Monday morning that on Tuesday the government will sell through LIC 4 cr shares at a floor price of Rs 260. This assures the following. The government will receive come what may Rs 260 x 40 cr shares or Rs 10,400 crs. On Tuesday all those interested in buying the shares would queue up on the special window on the exchanges and bid for the shares which would be in the public domain. At the decision of LIC, the people in the queue and at a cut off that LIC would decide would sell the shares. Profit or loss would be on account of LIC. The government would receive its money without burdening LIC unnecessarily. The time element would be cut to the bare minimum and the sale for one companies share could happen every day and the total proceeds proposed to be raised in a week’s time. All the issues about costs, market conditions, global conditions could all be resolved in a short time and without impacting markets.
Certainly there would be pros and cons for every issue and there would be issues even in this proposal. Merchant bankers have been quoting fees of Rs 1 for managing issues of the Government, hence there should be no issue on that count. The Government could still have advisors to the issue and take the expert advice of such people. A mechanism for offering discount if any to retail and employees may have to be worked out if the selling shareholder so decides.
I believe looking at the tight situation where a mere three months remain in the current year and the target outstanding is almost 97%, this maybe a workable solution with fine tuning. This may also take care of the feeling that once the issue is announced of an existing company, the price tends to move down and gets hammered. Looking at the current circumstances this may be a possible solution and deserves attention.
