The Hindu : Mega offers evoke poor response

Online edition of India's National Newspaper
Thursday, Feb 26, 2004

Business

Business

Mega offers evoke poor response

By Oommen A. Ninan

MUMBAI, FEB. 25. The sheen seems to have come off the much-hyped `India shining' gameplan of `disinvestment' undertaken with much elan by the Government. In what is probably a classic case of `too much too soon', the virtual flood of offers for sale of equity shares by the Government in public sector units (PSUs) has, to put it mildly, come a cropper.

With the Government's disinvestment process in full swing, the markets are showing an increasing distrust in the prices being offered and market indices are also falling sharply. ONGC was the biggest loser among the Sensex members, slipping below the Rs. 700 mark amid fears that the forthcoming mega offer for sale by the Government to sell 10 per cent equity of the public sector enterprise may not get a good response.

Today, the Bombay Stock Exchange 30 share sensitive index (Sensex) fell by 116 points while last Monday it fell by 153 points. In the last one hour of trading today selling pressure intensified after the Government admitted a poor response to its public offers and the BSE PSU index plunged by 3.17 per cent. In its bid to meet its disinvestment target of Rs. 14,500 crores for 2003-04, the Government has already offered its residual stake in IPCL, CMC, IBP, Petronet LNG, Dredging Corporation and Power Trading Corporation. The mega issues of GAIL and ONGC are slated to hit the market in a few days.

The distressed statement of the Union Disinvestment Minister, Arun Shourie, in New Delhi today that the Government had identified people responsible for pulling down stock prices and fixed the responsibility of financial advisors (merchant bankers) to motivate and inform the public. The underlying message is that some merchant bankers appeared to be making these offers look unattractive.

The question really is whether it would be possible for such an eventuality. The reason is simple in that the Government, for the disinvestment process, has engaged the bigger and well-known names in the profession. It is unlikely that the very merchant bankers handling the issues will stake their credibility by showing the offerings in poor light. Also, the other players in the merchant banking fraternity are not large enough to be able to pull off the ploy the Minister is suspecting. It is not unreasonable to expect that if at all the market is going down, it is merely reacting to market forces.

The reasons for this too are not too far to seek. One issuer, namely the Union Government, is bringing to the market a capital offering of around Rs. 14,500 crores in a span of less than three weeks. When there is such a large offering, investors are bound to recycle some investments by selling or swapping portfolios. Any lay investor would surmise that he could very well buy these very same offerings from the secondary market at a price more attractive than the one fixed by the Government. So he would prefer to stay away from the offer. In the run-up to the elections, the disinvestment process is politically sensitive. But the market also is sensitive on the threshold of the elections.

Interestingly, when Margaret Thatcher, the former British Premier, ushered disinvestment into Great Britain, she sold Government shares to the retail investor at a lower price and when the markets rose, investors benefited hugely. However, the Indian Government rushed to the market when prices were at their peak.

Though the Government says that the oil company prices are `attractively' priced, they are still at three-year highs. Creating wealth in the hands of the people is politically more correct than the Government trying to `look good'. At the offered prices, valuations and multiples are very high and there are steep downsides. Informed investors seem to be choosing caution considering the only upsides for most of these sectors and stocks would be at historic highs.

It is only the old theory of supply and demand and when there is so much of supply flooding the market, the market discounts the price from the offered price. Another theory is also importantly at play, competition rationalises prices. In its haste to complete the disinvestment process, the Government has offered stocks which are in similar or same industries, thus creating what could be termed `unhealthy' competition with each issue vying with the other for investor's attention. For example, ONGC, GAIL, Petronet and any other oil or exploration company are competing with each other.

The 1992 stock boom witnessed too much money chasing too few stocks but now in an ironic role reversal, too many stocks appear to be chasing too little money. The crux of the whole issue is that these issues should have been staggered and approached the market over a period.

Mr. Arun Shourie should have worn his old banker's hat and planned the disinvestment by creating wealth in the hands of the people instead of searching for crutches when things go wrong.

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