PSU public offerings: A win-win for all

1. PSU public offerings: A win-win for all Prithvi Haldea PRIME Database The PSU CEO Conclave Exploring Capital Market Opportunities Organized by BSE Kolkata, 27 March 2009

2. With Rs.15,000 crore of PSU divestments in 2003-04 through public issues, hope was generated that government had finally become serious about PSU divestments and more so about doing this through public offerings route. Change in the government in May 2004 changed all that. While stated intentions of majority in the government were noble on the divestment front, compulsions of coalition played mischief. Serious divestments were in sight…

4. Given the political and social compulsions, full exit by the government leading to privatization can surely be put on the backburner. However, urgent need to evolve a national consensus for PSUs on - part divestments, where post-offer control shall still substantially rest with the government - raising of fresh capital from the market for expansion programmes. Going forward

5. There are as many as 139 profitable CPSEs. In many cases, they are a monopoly/market leader. Implicit Government support is available to CPSEs, and for ever. These make for perfect capital market candidates. PSUs are high-quality for the capital market

6. Arguments in favour of PSU offerings are compelling

7. Benefits the Government with higher valuations post-listing

8. Public holding increases transparency and accountability. Listing helps in better corporate governance and efficiencies Fresh capital helps in modernization/ expansion/ diversification Benefits the PSUs

9. PSU public offering route provides much needed depth and width to our capital market; a grave scarcity of good listed companies and listed capital exists in the country that causes excessive speculation, volatility and gains/losses. Losses on PSU scrips are lesser. Benefits the capital market

11. Millions of new retail investors can be brought to the capital market and household savings can be utilized to help grow the economy. - (In a country of over 100 crore, we have only about 1 crore equity investors.) - (Less than 5% of household savings is moving into the capital markets) Benefits the economy

12. Benefits the investors

19. Divestment proceeds are now earmarked for the National Investment Fund to be utilized for social welfare activities. Benefits the social cause

20. This is the best time, as ever. There is nothing called an “opportune time”. With credentials not under question and with right pricing, investor response is assured. PSUs/Government should not await the revival of the market to float the PSU IPOs in the hope of getting better valuations. Private promoters can be greedy, Government should not be. Will help revive the capital market

21. Government should realize that such IPOs can actually be the instrument for the revival of the market and that PSU IPOs can become the harbinger of good markets. Remember that it was a PSU divestment- Maruti in June 2003- that had earlier led the recovery of the market.

23. Once the momentum starts, sentiments would improve. Investors have to be brought back to equity.

24. As good a time as ever for government to - enlarge investors’ base and the capital market - revive the market sentiments, and - raise money that it so desperately needs.

25. Only divestment, either fully exiting the company or through part divestment (like ONGC and IPCL) Part divestment-cum-fresh capital offering (like NTPC) Only fresh capital raising (like PFC) 3 types of PSU public offerings

26. Modalities of PSU public offerings

27. This is totally criticism-free; allotments are to anonymous investors. Only through the public offering route...

28. No one can have opposition to the beneficiary being the common man! These are public enterprises and benefits of divestments should belong only to the public. Moreover, this policy would be politically correct. Only to the retail investors…

29. Does retail have the depth? It has now been clearly demonstrated that the domestic retail appetite is literally infinite for good offerings.

33. And retail investors will come easily,with potential of significant gains, courtesy inherent under-pricing and credibility of PSUs.

34. Some portion of IPOs can be reserved for domestic institutions.

35. Retail investors are ill equipped for bookbuilding; in all past issues, over 97 per cent of them used the “cut-off” option. Only through fixed price method…

36. To enlist greater participation of, and benefit, small investors, IPOs should be made at reasonable prices, and FPOs at a significant discount to the market price. This may not maximize returns for the government. However, wealth created by public enterprises through domestic public resources should be shared rightfully only with the public. At reasonable prices…

37. Government/PSUs should not be concerned about lower valuations. This is public money going back to the public. Significantly, there would be no post-listing pressures/embarrassments. The PSUs would forever be in the Thank You list!

38. In any case, the true price discovery will happen post-listing, and since the government would still be holding 90-95% of the stakes, its gains would be substantially higher than the small loss it will incur in pricing the IPOs low, as has been demonstrated in the past.

39. Increase in Government’s wealth post-listing

40. Scheme for allotment should ensure as wide a distribution as possible. No individual investor should get more than Rs. 1 lakh in allotment. - This will have another positive impact: a very wide distribution reduces post- listing selling pressure; large sales by institutional investors often destabilize the prices. As widely distributed as possible…

41. Allow investors to get allotment in physical mode. They would be saved from the hassles of opening demat accounts. They would also save on custodial charges; many investors may like to hold the “family silver” for long periods. Only for selling, demat account may be mandated. With physical mode,if desired…

42. The ASBA process should be actively promoted ;this would save the investors from blocking their monies and from subsequent refunds mess. Using ASBA process for applications…

43. Critical to keep the employees happy as also to reward and retain the employees. - This will have another positive impact: Labour Unions would not act as a deterrent/ become instruments for negative media coverage. And, with ESOPs/employee reservation.

44. As public offerings would only be from profitable PSUs, hardly any negatives regarding the issuers’ credentials. Government paper offers to the retail investors the ‘safety of capital’ that they want and the comfort that PSUs will not go overboard on pricing. No question marks on credentials

45. Now ,some more suggestions…

46. PSUs should ask for special regulatory relaxations

47. Independent Directors are appointed by Ministries/and are political in most cases, and the PSU has no control over it. Such appointments take unnecessarily long time (as was seen in NHPC/Oil India, forcing them to defer their IPO by more than 1 year, and when they became complaint, the market conditions have forced them to defer. As such, 2 good IPOs that could have happened did not). Some of these directors may not add value. PSUs, unlike private sector companies, are subject to much more additional audit like CAG, Parliament ,CVC etc. Relaxation 1Removal of Independent Directors clause

48. In any case, despite non-compliance for more than 3 years by already-listed PSUs, SEBI has not taken any action, signifying non-seriousness/helplessness of this non-compliance. Compliance of this clause, if at all, can be insisted upon only if the appointment of independent directors is left in the hands of the Chairman/Board of the concerned PSU.

49. PSUs should be encouraged to enter the capital market. 10% or 25 % public holding requirement may not be possible on both initial and continuing basis due to size/political considerations. Recent moves to have a standard minimum public holding should be opposed. Relaxation 2Relaxations in initial and continuing public holding % requirements

50. Given the nature and credibility of PSUs, along with an outstanding and long track record, IPO grading is meaningless. In any case, IPO grading has proved to be futile. Relaxation 3Do away with IPO grading