Stock taking

EDITORIAL

It appears that after realising that its disinvestment strategy through follow-on public offers (FPO) has failed in the past three issues, the government is having a rethink on available options. Though late in the day, the move to consider the qualified institutional bidder (QIB) route for public sector share sale is a step in the right direction. But the QIB route need not be the only way. There is a need for innovative financial thinking on part of official planners and merchant bankers if the government wants to meet its divestment target. Given the fact that the overall market dynamics has changed drastically since it last tapped the capital market in a major way, it is very important for the government to change its own approach. Any strategy must take into account the liquidity of a particular stock and the market behaviour of a particular sector over a given period leading to the time of an issue. If, say, at any point the market gives an average price multiple of 10 to a particular sector, it would be wrong on the part of the government to expect a price-earning multiple of 12 on the strength of the company in question being government-owned. This, when many a times in the past, institutional investors have raised issues of corporate governance and sudden changes in government policy, that affect the working and earnings of PSUs. The government must wake up to the need to offer discounts to the price-earning multiple that a certain sector attracts under prevailing market conditions. If we look at the last three issues from the government stable, one cannot hide the fact that largely public sector financial institutions have bailed out these issues as well as the merchant bankers to these issues. It is clear that PSU financial institutions readily defer to government missives while issuing cheques rather than heed advice from merchant bankers to invest. The government must hold merchant bankers accountable for the kind of promises they make at the time of winning the mandate to become lead managers. In the present scenario, the government must deal with two major issues. First, encourage genuine subscriptions instead of asking LIC and SBI to put large applications. The second is to ensure retail participation in FPOs and IPOs. A better method may be to divest in unlisted PSU firms with a high discount for retail investors. This will instil confidence in retail investors that investing in public issues would yield good returns both in the short and long terms. Once such confidence is built, it would attract them to FPOs. Though their assumption may be wrong, most retail investors in India believe that money put in IPOs or FPOs must necessarily lead to gains on listing. This can happen only when issues are priced at a good discount to inherent value of the stock. In the case of an FPO, government should decide on the extent of discount to retail investors; and opt for dual pricing. For stocks available in the derivative segment, the government must come out with special guidelines to deter manipulators from artificially depressing prices and affecting issues. For the government to decide on a particular mode of divestment, it must consider whether the objective of such an issue is to garner maximum value for itself or fulfil its own desire of making every Indian a shareholder of public sector units.