Special Report: Strategizing The Disinvestment Scenario

The rising fiscal deficit level is of grave concern for the economy. Going by the present levels of this crucial macro indicator, it has already touched around 95 per cent of the fiscal deficit target of 4.1 per cent for FY15. Despite that, the prime minister and the finance minister don’t seem to be moved by this fact and are quite confident about meeting the fiscal target. In fact government planners have already chalked out a rigorous plan to mop up government finance to take care of this increasing level of fiscal deficit. First, a huge amount of cash flow is scheduled to come via the spectrum auction during February-March when the tax mop up also increases during the last quarter of the fiscal.

At the same time the government has also put in place a war-like strategic plan for the Big Bang disinvestment plan of public sector undertakings (PSUs). However, the most interesting part is that no government official wants to talk about it and each one is trying to keep it an ‘ultra secret’. The finance ministry is quite conscious about the valuations of the PSUs that are scheduled for disinvestment and unlike the past wants to take the markets by surprise so that the stocks can withhold the beating that they usually get during the run-up for a stake sale.

Making Timing Difficult

The government’s strategic thinkers have coined an all-new approach to the disinvestment plan this year and are hoping that by this they will be able to counter the punters and operators at the bourses, who usually short the scrip in the hope that it would be available at a lower price afterwards. The strategy is quite simple: similar to the markets, the government also wants to make its disinvestment plan unpredictable and difficult to time and is implementing this by taking approval from the Union Cabinet regarding stake sales in various PSUs. A note is being prepared for other PSUs and the stamp of the Union Cabinet (UC) is expected to be put on it soon.

The present scenario is that the finance ministry already has the UC’s approval for the disinvestment issues of Coal India, ONGC, REC and PFC and the Department of Disinvestment (DOD) is working overnight to prepare itself for proposed stake sales in many other PSUs like IOC, RINL(IPO), MOIL, Concor, NHPC, MMTC, HAL(IPO), SJVN, THDC(IPO), MMTC, etc. “There is clear instruction from the finance ministry that all the required preparation will be made for a stake sale in around 10-15 companies so that the disinvestment process can straightaway be started in any of the companies that offers good valuation during the next 2-3 months,” quips a finance ministry official. “The idea is that there won’t be enough time with market operators, particularly FIIs, to drag down the prices of any particular scrip pitching for a stake sale,” he adds.

Though the government had set a disinvestment target of Rs 43,425 crore for FY15, it has been able to garner only around Rs 1,700 crore so far via 5 per cent stake sale in SAIL, and each time it moves ahead on its disinvestment exercise, it experiences a tumble in the prices. This has also made the finance ministry officials a little jittery who are now totally tightlipped about the course of action and order in which the disinvestment process will start. “I can’t say anything about the timing or the company that will go first for disinvestment and also advise you not to make guesses as whenever any guesswork or rumour is spread by the media regarding stake sale of any PSU, the counter experiences a tremendous beating and the whole exercise becomes futile, not to forget the pressure on us over the logic of offloading the stake at such poor valuations,” remarks another ministry official closely engaged in the disinvestment process.

Therefore, going by the preparation of the finance ministry, it seems almost likely that the government will miss the disinvestment target for the current year though it wants to be as near to the target of Rs 43,425 crore as possible through various other issues. Even if the issue of ONGC’s OFS doesn’t come around this year, the government should be able to build up a corpus of Rs 45,000 crore via disinvestment, but for that it is imperative that the other issues are conducted on time.

ONGC and RINL Almost Ruled Out

Going by the development at the government level, ONGC’s 5 per cent stake sale has almost been deferred due to uncertainty over the crucial subsidy-sharing formula. Dharmendra Pradhan, State Petroleum Minister (I/C), has already hinted that disinvestment in the biggest explorer of the country would take place only after clearance of the subsidy-sharing formula, which is currently hurting the company. Actually, due to a sharp fall in crude price, ONGC has found itself in a soup due to this controversial formula whereby it is providing more subsidy discounts to downstream companies than the actual realisation.

Currently the Indian basket price for crude is at around USD 43.50/bbl and as per its past commitments, ONGC has to give a discount of USD 56/bbl to oil marketing companies, thereby seriously impacting ONGC’s finances. Though the ministry is working quite briskly to correct this anomaly, it is doubtful that disinvestment in ONGC could take place this fiscal. “I don’t think the ONGC issue will come this fiscal as a number of issues need to be resolved and the declining crude price will not fetch good valuation for the company. Going by this logic, the ONGC stake sale could be scheduled for next year but ultimately it all depends on the government’s decision at the last minute,” informs a senior finance ministry official.

On the other hand, the declining crude price has suddenly become beneficial for Indian Oil Corporation (IOC) and the finance ministry has asked the petroleum ministry to swap IOC in place of ONGC. Importantly, the government has also offloaded 10 per cent stake in IOC in February-March 2014 via a block deal, wherein ONGC and Oil India picked up 5 per cent each, fetching just over Rs 5,300 crore to the government. As per the finance ministry sources, the DOD has moved a Union Cabinet note for another 10 per cent stake sale in IOC via OFS, which will be taken up by the Cabinet Committee of Economic Affairs (CCEA) soon. In all probability this issue will hit the market during this fiscal. At current valuations it will fetch around Rs 8,100 crore to the government. Currently the government holds 68.57 per cent in IOC.

Apart from IOC, Container Corporation, MOIL and NHPC are also on the disinvestment radar as these companies have good valuations at the bourses. Up to 5 per cent disinvestment both in Concor and MOIL and 11 per cent in NHPC will fetch around Rs 4,200 crore to the government’s kitty. Companies like MOIL, CIL, NHPC, STC, MMTC and Neyveli Lignite (NLC) are also on the government’s radar due to the SEBI’s minimum public shareholding norm of 25 per cent that will have to be adhered to within a span of three years.

In all these companies the government holds more than 75 per cent. An important factor to note is that in August 2014 SEBI eased out norms for offer for sale (OFS) so that retail participation in OFS issues can be increased. For this, 10 per cent of the issues will be reserved for retail investors and the seller can also give a discount to retail investors at the cut-off price. Considering this the government is also making efforts to increase retail participation in the coming PSU issues.

Coal India OFS and Second Tranche of PSU ETF to Hit Markets Soon

Efforts are in full swing at the finance ministry level to anyhow bring the OFS of Coal India (CIL) to offload 10 per cent stake during this fiscal as this issue alone can fetch more than Rs 23,000 crore at its current valuations. As such, certain issues and other nitty-gritty have been sorted out at a supersonic speed so that the issue will experience smooth sailing at the bourses. The government is quite confident that even in a worst case scenario the CIL issue would bail it out during this fiscal and provide the crucially required finance to plug the widening fiscal deficit gap. “All the necessary preparations for CIL have already been made and we are just waiting for the ‘go ahead’ signal of the finance ministry. All clearances have also been received from the coal ministry,” says a finance ministry official. Road shows for the same will also be started soon.

Also, just like the previous fiscal, the government is preparing to end this fiscal with the sale of the second tranche of the PSU Exchange Traded Fund (ETF) hitting the markets. Tentatively this has been positioned for March but if some other big issue gets deferred, it can also come in February itself. Importantly, the government was able to collect around Rs 4,300 crore via the PSU ETF during its March 2014 via stake sale of 10 stocks in ETF, where 60 per cent of weightage had been given to energy sector stocks such as ONGC, Oil India, and GAIL. As per our sources, the DOD has already chalked out a plan for the sale of a second tranche of PSU ETFs and this time the government wants to raise around Rs 6,000 crore. For this a Union Cabinet note is being made by the DoD. A higher amount will be aimed for through more stocks being taken into account and with better valuations, dilution via ETF will fetch a better price than last year.