DISINVESTMENT DRIVE: BONANZA FOR RETAIL INVESTORS

The government has geared up to raise crucial funds from non-planned sources and in this league it has conceived a long-drawn strategy to generate a huge amount of funds via disinvestment of public sector undertakings (PSUs) during the current fiscal. To be able to do so, the government has planned a two-pronged strategy for disinvestment; first, it is focusing on profit-making PSUs where some stakes can be divested via FPO, OFS and even IPOs and second, it is also deliberating on a “strategic sale” of loss-making sick enterprises where the government thinks that revival of these companies is not possible. Finance Minister Arun Jaitley has chalked up a target to corner around Rs 69,500 crore via disinvestment with Rs 1,550 crore having already been raised via the OFS of Rural Electrification Corporation in the first month itself.

The Big Bang strategy that the government has coined for disinvestment clearly indicates a great opportunity for retail investors to make good of their investments in PSU stocks as handsome discounts have been earmarked for them in the disinvestment process. With the kind of approach that the government is currently following for the FPOs and OFS’, unlike in the past, it has cleverly avoided the market beating of stocks going for disinvestment. Due to this strategy, investors, especially retail, have gained handsomely in the last two OFS’ of Coal India and REC.

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Disinvestment to Unlock Retail Investors’ Wealth

For retail investors it is of prime importance to somehow take into account the government’s disinvestment strategy during the current fiscal to make handsome gains, especially in the profit-making PSUs. In the current year the government has planned Rs 41,000 crore via stake sale of such PSUs and looking at the preparations that Department of Disinvestment (DOD) has made, at least one big OFS would surely hit the market every month during FY16. Already April has had the OFS of REC which witnessed a fabulous response from both retail and institutional investors. The Union Cabinet has approved the stake sale of various companies, including IOC, ONGC, PFC, NHPC, BPCL, Dredging Corporation, BHEL, CONCOR, NBCC, Neyveli Lignite, MOIL and SJVN. In all probability all these companies’ issues will hit the market during the current fiscal.

“We don’t want to give any indications about the exact timing of these issues as we would not like operators to play down the stocks by shorting as has happened in the past,” says an official of DOD. The biggest hope for disinvestment is the stock related to Ministry of Petroleum and Natural Gas (MOPNG), i.e. ONGC and Indian Oil. These two stocks will also prove beneficial for retail investors as the government is trying hard to somehow make these companies a good bet. For ONGC, in particular, the government is working on changing the controversial subsidy-sharing formula as early as possible.

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Actually, due to this controversial formula, ONGC’s financial situation has gone for a toss since it has to provide more subsidy discounts to downstream companies than the actual realisation. Currently the Indian basket price for crude is at around USD 60.55 per barrel and as per its commitments ONGC has to give a discount of USD 56 per barrel to oil marketing companies, thus seriously impacting ONGC’s finances.

The company has been demanding a change in this subsidy-sharing formula since the past six months as at one point of time it has had to provide a subsidy discount of USD 56 per barrel even when the crude price had slipped to around USD 40-43 per barrel. The concerned ministry is in the process of changing the formula and when that gets finalised it will pave the way for the OFS of ONGC to pitch for a 5 per cent stake sale that will fetch around Rs 13,500 crore to the government exchequer. “The DOD is planning to launch ONGC’s FPO during May and all preparations have been made for the OFS. As such, the Union Cabinet may resolve the subsidy-sharing issue any day now,” informs a senior ONGC official.

Once the subsidy-sharing formula’s anomaly is rectified, the profitability of ONGC will undergo a sea change and with the 5 per cent discount that would be available for retail investors, this would be like the proverbial golden egg. In the same league, Indian Oil’s OFS for 10 per cent stake offload has also been planned by the DOD and it will hit the bourses any time along with ONGC’s OFS. At its current valuation it may fetch Rs 8,600 crore for the government. More importantly, due to a decline in the crude prices in the international market, it would be beneficial for investors to take benefit of the IOC OFS.

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Committee to Report on Strategic Sale

Apart from profit-making PSUs, the new NDA government is making efforts to jack up finances via the strategic sale of loss-making CPSES too. Going by the FY14 CPSE survey, there are around 71 PSUs that incurred loss during the year and the government is working on a method by which the strategic sale of sick PSUs could be done. The finance minister has clearly indicated that the government can’t keep on funding these PSUs with the taxpayers’ money. As such, the era of strategic sale and privatisation of PSUs will return as had been the case during Atal Bihari Vajpayee’s government which had been in power from 1999 to 2004. The DOD has earmarked 15-20 PSUs which are loss-making and could be good candidates for strategic sale and even closure.

“The government has formed a committee under the chairmanship of an adviser in the DOD to select potential candidates for strategic sale among sick units and he is working actively to finalise the names. Already names like HMT, ITI, MTNL and Scooters India have cropped up among in listed space and deliberations are on to find the right buyer for these companies and the mode of their transfer,” informs a senior DOD official. There is a clear indication that HMT along with its three subsidiaries will be sold or closed down in due course of time. The strategic sale of companies like MTNL and ITI may prove beneficial for shareholders as these PSUs possess huge parcels of land and machinery assets that may attract good value when sold. “The problem would be for those companies whose net worth and book value has been completely eroded. It may be very difficult to find a buyer for them. Therefore, the department is actually conceiving a strategy to ‘settle’ these companies,” the official adds.

A PSU can be declared sick if it has accumulated loss in a financial year that is equal to either 50 per cent or more of its average net worth of the previous fiscal. The list of other sick companies will include Hindustan Shipyard, Bharat Coking Coal, Bengal Chemicals, Air India, Tundabhadra Steel, BSNL, National Jute Manufacturers, Burn Standard, Konkan Railway Corporation and British India Corporation. The sale of these companies may take place over the next two years.

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Top 200 Companies May Declare OFS

During this strategic sale, the FPOs of NBCC, BHEL and Dredging Corporation would also be beneficial for retail investors. As to whether a particular company will come out with an OFS or FPO (follow-on public offering) will depend upon the criteria of whether that company is within the top 200 companies by virtue of its market capitalisation in any of the last four quarters. Any company that fits into this group may come up with an offer for sale (OFS); otherwise it has to resort to the lengthy process of stake sale i.e. FPO. Meanwhile, if that particular stake sale happens to meet the minimum public shareholding requirements of the Securities Contracts (Regulation) Rules, 1957 (SCRR), the company can announce an OFS, even if it doesn’t find a place in the top 200 companies. In August 2014 the SEBI eased the norms for OFS so that retail participation in these issues can be increased. Now, 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. This explains the discount on the issues of Coal India and REC.

March 2017: Deadline for PSU shareholding

Currently there are 46 PSUs which are listed at the bourses and as per the SEBI’s minimum public shareholding requirement, all these listed PSUs would be given a window of three years to bring down government’s shareholding to 75 per cent and increase public shareholding to 25 per cent. This span of three years would end on March 2017. “We are in the process of making a calendar for the OFS these PSUs for the next two years. Though many companies like NBCC, Neyveli Lignite, RFC, etc. would generate good investor interest, companies like ITDC, STC, MMTC and NFL would find it difficult to generate that same level of excitement and therefore it is important that the various OFS’ be timed at appropriate junctures,” discloses a DOD official. This of course will be a good period for retail investors who can select good PSU stock and invest for long-term. A discount would also be available to them and a portion would be reserved for their subscription. Among these PSU stocks, NBCC, Neyveli Lignite and Coal India look quite lucrative as long-term investments.