Sucheta Dalal :Fishing In Troubled Waters
Sucheta Dalal

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Fishing In Troubled Waters  

Feb 23, 2004

The ruling party needs to worry about what happens if the market refuses to swing to a saffron tune


Fishing In Troubled Waters


 The public sector mega issue carnival has begun in earnest with the Indian Petrochemical Corporation Ltd (IPCL) offer being oversubscribed a modest two times on opening day. The shares of five other public sector undertakings (PSUs) will be sold in the next few weeks to raise a whopping Rs 17,000 crore for the President of India.

However, the high turbulence in the secondary market and the downward pressure on stock prices is causing market experts to worry about whether the recently revived primary market would wilt under the onslaught of massive PSU offerings and choke the IPO market again. But nobody dares to voice such sentiments for fear of angering a government that is unwilling to let any hint of a dark cloud mar its India Shining campaign.

But political planners, who spent a lot of time worrying over the implications of playing cricket in Pakistan on the ruling party’s electoral prospects, would do well to pay attention to the PSU fiesta as well. To my mind, it is bad policy for the government to chuck out the rule book, resort to excessive hype and lob dubious lures at gullible retail investors to get them to part with their money. And that is exactly what the government is doing.

Investment bankers would shrug and mutter about caveat emptor (or investor beware) but anyone who listened to the comments of retail investors on a recent CNBC television programme, know the truth. Investors interviewed by the channel were not only naive and trusting but fervently believed that PSU issues at a discount was their biggest investment opportunity.

The more savvy investors have been pointing out that PSU shares are quoting at a two to three year high, despite the recent drop in their stock prices. And although one expects government to be smart and sell its shares in a bull market, it is also expected to follow the rules.

Instead, price bands for all PSU offerings will be announced just before opening date giving retail investors very little time to analyse the most important factor in their investment decision. Second, PSUs are running massive corporate advertising campaigns after the offer announcement, which is contrary to the rules for private companies. They are only permitted to publish issue advertisements that carry risk factors listed in the offer document. PSU corporate advertisements carry no risk factors because it is the government who is selling its shares. Third, the money raised through divestment will go straight to the exchequer and not to fund expansion and diversification plans of the navratnas whose shares are on offer. Yet, the chairmen of most PSUs have been on road shows discussing significant expansion and diversification plans. The mammoth undertakings may well be able to fund these plans through internal accruals; but they have to be categorised as pre-issue hype because they are not committed in the offer document. However, the Securities and Exchange Board of India is studiously turning a blind eye to all these shenanigans.

Were the same issues being made in America, investment bankers would have worked overtime to ensure that all public issue norms were strictly followed. But when the government believes that mega PSU offerings will add to the ‘feel good’ factor, who is to stop investment bankers from pushing for bigger and bigger individual offerings? After all, investment banking fees are usually linked to issue size.

Another core issue to the disinvestment process is that the government has moved away from its original commitment to privatise PSUs and free them from the clutches of ministers and bureaucrats. PSU stocks may have soared when their floating stock was extremely low, but once the shares are more liquid, institutional investors, especially foreigners, are going to pay a lot of attention to management autonomy and political interference. Rajiv Pratap Rudy’s recent shenanigans at the aviation ministry have done nothing to encourage their confidence, especially since his actions seem to have been condoned by the government after he paid up his fat five-star hotel bill.

Instead of abandoning privatisation, the government could have made some effort to create an autonomous structure for holding PSU shares by reviving the National Shareholding Trust that was proposed by former Disinvestment Commissioner GV Ramakrishna or its variant suggested by the finance minister’s advisor Vijay Kelkar. Such a Trust would have allowed the government meet its disinvestment target and would have been an important step towards greater autonomy for the PSUs. The structure of a holding company for PSU shares is working well in the form of Tamsek Holdings, the Singapore government’s state investment arm, which has had a successful run since its inception in 1974.

Before the government decides on the pricing of its other mega offerings such as ONGC, GAIL, Dredging Corporation etc, the BJP think-tank would do well to pause and reflect on the consequences of newly listed PSU shares trading below their offer price. Consider the sequence. All the mega offerings will be completed before March 31, when investors are most hard pressed for funds to invest in non-tax saving instruments. But even if all the issues go through successfully, will they list at a premium and remain at a high until election time? If not, what happens to India Shining?

But instead of focussing on pricing of issues, the government is desperately trying to give further ballast to the secondary market by facilitating the entry of foreign hot money into the market. So, the regulator first declared that it wouldn’t mess about with investment through Participatory Notes; it then reduced the contract size for derivatives trades to attract greater retail participation (much against the wishes of leading stock exchanges). Next, it promised to permit margin trading and is expected to issue a circular in the next few days, and finally, it has worked overtime to formalise the direct investment by hedge funds into Indian stocks. All these actions are desperate attempts to keep the secondary market buoyant and are probably being dictated by short-sighted political advisors.

If their machinations work, the ‘feel good’ factor could remain intact until election time, but the ruling party needs to worry about what happens if the market refuses to swing to a saffron tune.


-- Sucheta Dalal