The many ways of skinning a cat

With just a few months left to bridge the yawning gap in its finances, the government is using all its inventive powers to solve just one problem: how to raise quick cash from the public sector.

With the stock markets in disarray, the straight-forward and most reformist route of selling government stakes in Public Sector Undertakings (PSUs) to the public is not very appealing. Instead, nearly half a dozen new ‘ideas' have been mooted in recent months to make state-owned enterprises disgorge their cash.

IPPs vs IPOs

The ideas started with blatantly unfair ones such as persuading PSUs to put through promoter-only buybacks. This would keep out minority shareholders like you and me. But they have become more subtle now, like pledging shares belonging to erstwhile Unit Trust of India or opening up new windows for PSUs to sell shares without approaching the public.

The latest move in this direction is SEBI's decision to allow companies to dilute promoter holdings through Institutional Placement Programmes (IPPs). The IPPs differ from the existing mechanism for initial public offers or follow-on offers in three ways.

One, unlike IPOs, IPPs need not go through the long-winded process of a road-show, a price band or inviting bids from retail and other investors through the book-building process. Instead, companies can simply fix an indicative price just one day prior to the offer.

Two, such offers need not have any retail participation. Instead, they can be made only to qualified institutional investors. Each issue needs to have only 10 institutional investors. And, three, allotment of shares under IPPs need not be on a proportionate basis. Instead, it can be based on the highest price or any other criteria which the company decide on.

Made for PSUs

Now, SEBI has qualified these relaxations by saying that such IPPs can be used by companies only to meet the minimum public shareholding norms. (Minimum public holding norms require private companies to have a 25 per cent non-promoter holding and PSUs to have a 10 per cent non-promoter holding).

Moreover, companies can only use this to increase public holdings by a maximum of 10 per cent. These two criteria effectively make this a most convenient route for PSUs to sell shares.

As many as 11 listed PSUs currently have promoter (read Central Government) holdings of 90 per cent plus and can easily adopt this route to ‘comply' with minimum public shareholding norms.

Very few private companies, on the other hand, have promoter stakes of 90 per cent-plus. Even if they use this route once, they will not comply with the minimum public holding norms.

The flip side of IPPs

One may ask how PSUs will be able to sell shares through IPPs in a market which has no appetite for share sales of any sort? And, why would institutional investors who shy away from a normal share sale, willingly buy shares of PSUs through the IPP window? There could be two explanations for this.

Either the government hopes that marketing small tranches of shares to a select set of institutions will prove easier than putting up chunks for sale in the open market. But if this is the hope, then the government must not expect these stake sales to fetch attractive premiums over the market prices of the PSU stocks.

Given the market conditions and the desperate straits of the seller (the government), bona fide institutions will surely negotiate purchases at or below prevailing market prices of these PSUs.

The other possibility (not a far-fetched one, considering the 10-investor rule) is that the government hopes to gently persuade institutions such as the public sector banks and the Life Insurance Corporation, over which it has some control, to pick up holdings in PSUs at an attractive price.

Don't do it

That would be an ill-advised move on many fronts. These institutions already need all the capital they can get to fund their core business and participating in share sales may not be in the best interests of the depositors, shareholders, policyholders who are the stakeholders in these institutions.

There are also other problems with using this shortcut to dilute government holdings in PSUs.

If shares are sold to as few as 10 institutions, this will surely not meet the real objective of the minimum public holding norms that were announced with much fanfare in 2010.

After all, the main purpose of this rule, introduced with much fanfare in 2010, was to broad-base shareholding in Indian companies, increase their free float and thus expand market depth and liquidity.

If IPPs are a backdoor method to facilitate transfer of PSU shares from the government to public sector banks and other institutions, this will not serve the primary purpose of divestment either.

Of course, the only purpose they may serve quite well, is the short term expedient of raising the cash necessary to plug the fiscal deficit.

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