Win-win disinvestment

Last Updated: Wed, Sep 19, 2012 10:40 hrs
NMDC 2010/11 volumes up 9 pct, raises ore prices

India's annual disinvestment circus is all set to hit the road, with the Union Cabinet clearing the sale of shares in four more public sector undertakings as part of its Friday package. Some important factors provide an opportunity for the government to go for a clean and win-win disinvestment this year. First, of course, its target this year is not as stiff as in previous years.

In each of the past two years, the government targeted Rs 40,000 crore and fell short by a mile. For 2012-13, the budgeted target is Rs 30,000 crore, a good 25 per cent less. Second, the world is flush with cheap and easy money unleashed by growth-focused central banks - and some of these funds are definitely looking for good quality paper. They wouldn't mind picking up shares in some of the state-owned natural-resource players lined up for sale.

But the government needs to get the manner of disinvestment right. Proper pricing is crucial. Recent experience shows that whenever the government gets greedy with pricing, it faces difficulties in finding buyers - and state-owned institutions have to come to its rescue. It is not true disinvestment if public sector units are sold to publicly controlled financial institutions. That merely shifts a basket from one arm of the government to the other - a mockery of the motivation underlying the disinvestment process.

It does not help improve diversity in shareholding and, consequently, has no impact on corporate governance, which the share sale is supposed to bolster. And while the government sells the whole process as people's ownership of public assets, small investors in the institutions that make such forced purchases are left carrying the losses. A couple of follow-on offers such as those for NMDC in 2010 and ONGC earlier this year are examples. NMDC was sold in 2010 at Rs 300 a piece; today it trades at Rs 191. ONGC was sold at Rs 290 in March; today, it's Rs 279, despite the last week's reform-induced run-ups.

Smart pricing and clever marketing are in any case a must for any share sale. Given the wide array that is lined up, pricing has to be case-specific. In companies such as Hindustan Copper, MMTC, and to some extent NMDC, where market prices are unrealistic due to the low free float, the discount has to be steep. In the first two, the government holds more than 99 per cent.

In NMDC, it owns 90 per cent and LIC 6.15 per cent. Such concentrated holding does not allow for proper price discovery. And offering them anywhere close to the prevailing market price will be a recipe for disaster that sends more overpriced lemons to LIC's kitty. Other fundamentally strong and widely held companies such as SAIL, Nalco and BHEL can be priced closer to their current levels - though a good issuer always leaves something on the table for the buyers. If last week's events have already swung sentiments in North Block from fear to greed, then it's a different matter.

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