Mar 20, 2013, 09.26 PM | Source: CNBC-TV18
Prithvi Haldea, MD, Prime Database is not happy with the way government has handled its divestment programme.
Prithvi Haldea (more)
CMD, Prime Database | Capital Expertise: Equity - Fundamental
Speaking to CNBC-TV18, Haldea said fiscal deficit cannot be the only objective for government’s divestment plans. From the Indian context, expansion of the capital market, addition of depth and inclusion of retail money should also be looked into.
The government also has the option of using closed auction instead of doing only offer for sale (OFS) method because Securities and Exchange Board of India (SEBI) guidelines allow closed auctions, Haldea told CNBC-TV18. Probably closed auctions could provide better realisations he added.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Do you think the government is losing its way with what seemed like a promising divestment program when it flagged off first with National Aluminium Company ( NALCO ), half of which went to Life Insurance Corporation (LIC). Now, with Steel Authority of India ( SAIL ) becoming such a big question mark, do you think it could have been done differently and better?
A: We have already heard that SAIL may probably not happen this financial year. They are looking at a date in the next financial year and next financial year does not necessarily mean April, it could even mean next March. We have seen this year almost all divestments taking place in the last three month.
I am not happy with the way the divestment has been handled. I have many issues. One is that for illiquid stocks, are we really discovering the right price, are we really offering the stocks at the right price? We have seen huge fluctuations in the prices and I have been advocating that we should have a closed auction. SEBI guidelines do allow for closed auctions, where you don’t disclose the offer price. Let the institutional investors who are supposed to be wise investors, take a call on at what price, how many shares do they want to get. You may probably get much better realisation in case you had a closed auction.
For liquid stocks, we have seen how much of hammering has been done and the best example of course is Power Finance Corporation (PFC) which fell down from Rs 400 when the FPO is announced to almost Rs 250 when the issue happened. Nobody is bothered about the huge losses that government makes when the prices that are hammered between the date of announcement and the date of the issue but we always crib about the demand for government to make a divestment to retail investors at a discount to the market price.
So, both in terms of closed auction not being used as the option and only using the OFS method entirely for institutional investors without any allocation for retail, I think the plot is being lost. Divestment cannot have just one single objective of meeting the fiscal deficit.
Divestment has to be viewed in the Indian context from the point of view of enlarging capital market, deepening the market, getting more retail money into the market but we have lost out on those fronts.
Q: Is it also a problem of choice, on Rashtriya Chemicals and Fertilisers (RCF), there was none of that institutional investor action we are talking about or interest even. On Steel Authority of India Ltd (SAIL) again that seems to be the problem, the ministry is working with one price, merchant bankers are suggesting another, are they making the wrong choices through what is essentially a difficult market period as well, they should be a bit more canny in what they choose to offer to the market?
A: Selection of the right company at the right time is always critical. Here we are talking of some of the best public sector undertaking (PSU) stocks annd not talking of loss-making PSUs or PSUs, which are in minority positions in the market place. We are talking about dominant PSUs coming to the market.
Therefore, there is a certain value that the market perceives of this. We cannot be guided by the current fluctuation in the market price. We should convert these opportunities from trading to investment opportunities.
What we are looking at today is more of arbitrage between the offer price and the market price. This whole strategy has to be to encourage long-term investors who are looking at acquiring large number shares of a particular company and they may be willing to pay a price, which they think is right for a long-term basis.
However, if the entire orientation is around the market price and how you can make quick money purely through arbitrage and there is no investment happening. You are talking of a difference between the market price and the offer price then the government does come under pressure all the time to look at a price, which is close to the market price, which is at a discount to the market price. In some cases it is at a premium to the market price but in those cases, the premium is more in the air because there is no true value even of that price which is the market price.
We should trust the market in terms of valuation rather than our taking a call on valuation based upon market prices.
Q: My point is for something like SAIL, the business prospects have been poor for many quarters now. On RCF, there is no clarity on fertiliser policy but the issue came through. So, is the government making judicious choices on that premise?
A: First of all we have to appreciate two points, in each of the sectors that PSU operates in, there are governmental interventions. Therefore that would always be a concern, whether the policy of the government is in place for a divestment to take place. Secondly, the market knows that PSUs do have operational interference from the government. Therefore, these two factors are always discounted in the market price and people do take a judgement on what could be the likely impact of governmental intervention both in terms of policy as well as operations.
I personally do not think that is a critical, unless one of the companies is doing so badly in that sector and the sector is itself on the whole is doing very badly. Then you obviously do not push that kind of a company to the market. For other companies, I don’t see a risk in terms of pushing them to the market. SAIL is a dominant steel player in the market, its performance has been fluctuating from time to time but we all know that SAIL is going to be there for good times. There would be people who would be interested in acquiring SAIL on a long term basis rather than as a trading opportunity.
One of the examples that I keep giving for valuing a company is when private equity (PE) investors buy into a company on a three year-five year horizon, they are not too perturbed about the current scenario. However, in case the company has been terribly bad news and the sector is doing extremely badly then obviously you should not be pushing those kinds of companies because there would be lot of negative sentiment around that company and that sector. Otherwise I am not too concerned about the companies going to the market because we are talking of all profit making and dominant PSUs going to the market.
Q: What about minority shareholders of these companies who are holding the stock because so much of the discussion is about who will pick up the paper, which is being offered now? What about existing investors because Coal India Ltd (CIL) did an initial public offering (IPO) at Rs 245 and because of all the uncertainty and the announcement of the offer-for-sale (OFS) or intention, the stock is down to Rs 295, which means people who bought 30 months back have made a compounded return of just 8-9 percent annually, should existing investors of Coal India not be taking the government to court for the kind of price damage or wealth erosion they have caused to their investments?
A: As per my understanding and the charts that have made of six OFS, the price of the starts falling down not because of the company is doing badly or because the sector is in trouble or because it is a political turmoil but the moment the government announces a particular company’s OFS, we see a decline in the price. There is definitely a market operation taking place and the obvious intention is to force the government to offer a price which is close to the market price.
Therefore, my suggestion has been that we should probably take the market by surprise. There is no need to announce the issue date one-two months ahead. You require only a two days notice and put the company under question, in a suspension mode like a corporate action where you are therefore not forced to match the price or be compounded by the market price.
These are all well-researched stocks, these are traded stocks, there is no additional information that is being heard to the market place, and there is no new study that is required to be done. The entire issue is about pricing. One of the things that we should do is to take the market by surprise and not make these announcements in advance because we have seen that prices have been hammered. Probably there is also no need to also investigate as to who are those people behind price hammering.
There was the famous case of Oil and Natural Gas Corporation (ONGC) many years ago where the government called all the merchant bankers and asked them who is pulling down the price. There was some action taken at that point of time. So, there is clear evidence that the market will try to force the government to offer a price as low as possible by bringing the market price down to as much possible as they can.
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