REBOOT
It is all about pricing
Ever since UPA 2.0 was formed last May, it has gone out of its way tohighlight its twin objectives of increasing public float and as anatural corollary diluting equity in public sector entities to widenand deepen the equity cult. It made similar noises in its previousavatar as well, but it lacked the intent and resoluteness to back itsvision. Hemmed in as it was by disconcerting allies, it did not havethe stomach for a fight. But 206 seats in May 2009 changed thelandscape somewhat. A comprehension that good economics could also begood politics dawned upon the netas very quickly.
“For a company to be listed and continue to be listed, it musthave a public stake of 25 per cent,” the Finance Ministry had saidwhile releasing a discussion paper on Public Holdings for Listing.“The larger the number of shares and the number of shareholders, thatis, the larger the public float, the less is the scope for pricemanipulation,” the discussion paper had stated in February 2008. Theproposed guidelines assumed significance as many companies were onlydiluting about 10 per cent of their stake through public offers at ahigh premium. In many big companies, public holding is between five to15 per cent. Close to 10 per cent of more than 2,000 actively tradedstocks at BSE and NSE have a non-promoter holding of less than 25 percent.
But this big idea was also significant for another reason. In an everincreasing institutionalised stock market, shares are either beingcornered by promoters or large foreign and domestic institutions whichinclude mutual funds. The retail investor has got squeezed out of theframe. So, step two was to have large public sector floats so thatmore people participate inthis gigantic wealth creation exercise. Indians are very large savers,gross domestic savings is 32.5 percent of GDP, down from 36.4 percentin the previous year. The nature of the beast is such that he isrisk averse, preferring to park his savings in bank deposits, postoffice savings and other instruments. After being singed repeatedly instock market scams, it decided to use other instrumentalities likemutual funds, but this avenue too has been disappointing in terms ofreturn on investment. Empirical evidence suggests that merely 6.7percent or so of Indians invests in equity as an asset class.
So, the large public floats of government owned companies - NTPC,NHPC, REC provided an opportunity to take this actionplan to itslogical culmination. But a flawed French auction methodology,aggressive pricing and absence of an attractive discount for retailparticipation has ensured its abject failure. If you want to lureretail investors and enlarge the ambit of the equity cult, then thefirst thing to do is to offer a discount. This could be at least 10per cent below the reserve price. The shocking part is that in some ofthese floats, government offered a 10 per cent discount to employeesand they failed to queue up. This is a sad and stark denouement. Someof these floats have been bailed out by government owned banks andinstitutions. The Satluj issue has been deferred to the next financialyear. The government has also realised that it cannot time themarkets. Nobody can. By rolling out an assembly line of highly pricedlarge sized public sector offerings in its endeavour to bridge thesocial spending deficit, it has sucked out liquidity from thesecondary market.
With money flying out of the secondary market due to global woes,primarily problems in the Euro Zone and of course large public sectorofferings, government finds itself in a quandry. No retail appetitedefies the very logic of enlarging the scope of public floats andenhancing shareholder wealth. On March 10, the mega NMDC issue openswith the price announcement a day earlier. This is a test case for thegovernment programme. By switching to the erstwhile book buildingformat, government has acknowledged the failure of the French auctionmethod. It also plans to give retail investors a five percentdiscount, but the question is - will that be enough for a Rs 20,000crore issue. Another flop show on the retail front like NTPC and RECwill leave the government with egg on its face.
(Afternoon D & C)
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