Lessons for country's largest promoter

Last Updated: Tue, Sep 11, 2012 04:07 hrs

Last week, a Central minister said the time was not right for the government to sell shares in a company that fell under the administrative control of his ministry. Let us apply this situation to a private sector listed company in India. The promoter is desperate to raise some cash. He wants to sell a part of his holding to meet his own commitments– could be personal or to invest in some new venture. His commitments are predetermined and he has to sell a certain number of shares to meet this.

Now, imagine the chief executive officer (CEO) putting a spoke in the wheel, saying the price is not right and time is not good. No private sector CEO worth his MBA would dare do this – less because he is scared of his masters, but more because it’s clearly not his business. Remember, this is just divestment of promoters’ holding. We are not talking about fresh issue of shares which will have a direct impact on the company’s balance sheet. Even a benevolent private sector promoter wouldn’t tolerate such back-stabbing.

Unfortunately, the government does not act like a private sector promoter. And, this is hurting the public sector companies and their investors. Even before such open posturing, the shares have taken a beating in divestment-bound public sector companies because of long, time-consuming procedures.

A recent BS analysis showed how the Steel Authority of India (SAIL) stock has lost two-thirds of its value since it was first cleared for divestment. Others such as Bharat Heavy Electricals (Bhel) and Hindustan Copper have also seen significant erosions.

While in the case of Hindustan Copper, there was some justification in the value erosion as the company’s stock was enjoying unrealistic valuations due to a thin public shareholding, a good part of the blame for erosion in widely held SAIL and Bhel stocks should go to the delays in divestment.

While politics should be ideally kept out, it appears practically difficult to do so. The government should at least look at cutting down procedures and allow the divestment department operate like a treasury. It should have powers to sell and buy in the open market. And, the divestment process which happens in ultra-modern stock exchanges that dwell in the world of milliseconds should be freed from 19th century bureaucracy. In these endless hours wasted in cabinet approvals, empowered groups of ministers meets, request for proposals and tenders, all of which add up to paltry savings of Rs 5-10 crore as investment banking and other fees, the government is destroying thousands of crores of investor wealth. It is also destroying its own wealth several times that number by the virtue of being the largest shareholder in these companies.

The government may have justifications for its procedures. It also has the CVC—CBI—CAG (Central Vigilance Commission-Central Bureau of Investigation-Comptroller and Auditor General of India) triumvate waiting to dig up skeletons at leisure. But, the market does not sympathise with the stock because the promoter is the government of India. Irrespective of the fundamentals, stocks hurtle downhill anticipating fresh supply of shares and increase in the free-float. The more the delay the better, shortsellers would swear. Market-friendly promoters have in the past have taught difficult lessons to such bears. The country’s largest promoter should take a leaf out of their books and allow itself the room and teeth to squeeze them out.

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