The finance ministry’s revised guidelines on minimum public shareholding for public sector companies have

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put the cat among the pigeons. On the face of it, the move appears to favour PSU companies. But it will help investors too, as a large quantity of public issues is never good news for the secondary market.

The ‘old’ June 4 guidelines from the North Block would have led to a deluge of follow-on public offers (FPOs) as nearly 35 listed PSUs would have to comply with the 25 per cent minimum public float norm. But the August 9 order reduced the obligation to just 10 per cent, that too within a period of three years. This shortened the number of PSUs requiring such compliance to just 15. Many feel investors who had bought shares in the original 35 club in anticipation of forthcoming FPOs have been stumped by the move.

In the two months between June 4 and August 6, share prices of 12 PSUs outperformed the 6 per cent gain on BSE Sensex. Central Bank of India, MRPL and United Bank of India notched 10 per cent or more while Scooters India and Andrew Yule rose over 30 per cent. Since the revised announcement on August 9, Central Bank has gained 7.33 per cent, MRPL notched up 4.85 per cent while United Bank of India shot up 11.61 per cent — in just five trading days.

"The government’s disinvestment agenda is strong. But there has been a relief rally on counters where unnecessary dilution has been avoided. Nobody likes dilution. Plus, low public holding has meant manifold amplified buying activity in comparison to a situation where public hold more shares. If you look at the effect of the old norms, many stocks had fallen for no apparent reason,” said Alex Mathews, research head at Geojit BNP Paribas Financial Services.

The old norms had a negative effect on counters such as NTPC, SAIL, Madras Fertilisers and PowerGrid, which fell between 2 to 6 per cent. Fresh from an FPO in February, investors in NTPC did not like the prospect of another FPO so soon and deserted the stock. The stock underperformed Sensex by 8 percentage points in the two months.

Another reason for the drop on these counters in an otherwise rising market was that FPOs are mostly priced at a discount to the market.

But at the same time, shares of PFC, Oil India, Bank of Maharashtra and NHPC rose. “Barring PFC, which gained 9 per cent, others rose along with the broader market, which gained around 1,000 points from June to the first week of August. In fact, after the new norms were made public, PFC and BoM gained 4 per cent in a flat market. This does not show any disappointment over the fact that their FPOs will not happen,” said Suresh Parmar, institutional head (equity), KJMC Capital Market Services, who has earlier worked in the treasury department of a PSU bank.

Investors also bought stocks like Nalco, PowerGrid and IOC over the past one week after all of them underperformed the broader market since June 4.

Interestingly, the picture is diametrically opposite for the PSUs that will almost certainly have an FPO. MMTC, Hindustan Copper, NMDC, RCF, HMT, ITI, State Trading Corporation and Andrew Yule have lost up to 12 per cent in value over the past week.

“Investors accumulate shares in anticipation of an FPO and sell when the news is out. In case of big FPOs, the general perception is that the allotment will be guaranteed since the supply of shares is huge. Many investors sell shares in open market and later apply for FPO. This may explain why MMTC lost some value recently,” said Jagannadham Thunuguntla, equity head at SMC Capital, which is working with the UBS as one of the merchant bankers for the Hindustan Copper FPO.

FPOs of Hindustan Copper and MMTC are certain to happen and the government is likely to mop up close to Rs 18,000 crore from these issues if it wants to adhere to the revised 10 per cent public float norm.

Some market men feel the government may even try to tap exempted companies to reach its disinvestment target, since the quantum of money that can be raised through some of these FPOs — such as NTPC, PowerGrid or Nalco — could be large.

The changed guidelines have come as a big positive for the market. If, as per the old norms, all 35 PSUs would have come to dilute stakes over the next two to three years, they would have absorbed so much of money that the secondary market would have been affected.

Anecdotal evidence shows the Indian market can absorb Rs 2,000-3,000 crore of papers (FPO/IPO) a month without much disturbance to the secondary market. But 25 per cent public float would have averaged Rs 2,000 crore of paper continuously for 60 months from private and public companies if stretched over five years, potentially endangering prospects of FPOs and the health of the primary market.

After the amendment, there will be substantial reduction in the number of public issues expected to come and amounts they are likely to raise.

“The revised announcement implies a significantly lower cash call on the market – from Rs 147,000 crore over FY11-FY15 expected earlier to a total issuance of Rs 43,420 crore over the same period with Rs 211,160 crore coming in from PSUs compared with Rs 121,000 crore earlier. In addition to freeing up capital for new listings, the relaxation on annual tranches also means companies now have the flexibility to time their capital-raising activities over this period, depending on market condition,” said Tirthankar Patnaik, a strategist at Religare Capital Markets.

“The lower quantum of papers on offer this year will be a relief for the market that has already seen Rs 70,840 crore picked so far in FY11, with $10 billion (Rs 46,000 crore) of FII inflows, but little by way of domestic institutional participation. Mutual funds have seen net outflows of Rs 11,960 crore year-to-date and regulatory overhang means there is little to expect incremental inflows from insurance companies,” said Patnaik.