Target Rs. 69,500 Cr: Share Disinvestment Another Word for Mis-selling..?

Share Disinvestment 

Another Word for Mis-selling..?

By Ms.Uma Shashikant, CIEL


The central government plans to raise much-needed money through selling PSU (Public Sector units) shares and the target buyer is the retail investor, who could well be taken for a ride, says
Share disinvestment decisions are often mired in confusion about market timing, pricing and distribution.

Sale of PSU Stocks..!

These decisions are also complex to make in a government environment where the benefit of hindsight is often used to question bona fide decisions.

Hiding behind a “greater good“ hypothesis is an easy tactic. A sharp sale of PSU shares can then be masked as enhancing the participation of retail investors, thus making them wealthy owners of equity shares.

Let us frame the problem correctly.
Uma Shashikant,  MD, CIEL

First, the central government badly needs money to fund its expenses & is short on routine tax revenues. Therefore, it is a desperate seller seeking to raise money by selling the shares it owns in public sector units (PSUs).

There is nothing noble or / benevolent in this action per se. Second, the government does not intend vacating its role as the manager of the businesses, whose shares it wants to sell.

That is why this exercise is called “disinvestment“ and not privatisation. So, the buyers of PSU shares cannot, unlike other equity investors, see themselves as owners of the business whose shares they hold. Government will own and run the business.

The retail investor, who is interested only in possible profit without any participation in management, is an easier bait compared to the institutional investor who will seek management control.

3rd, this target segment of retail investors is simply not into equity investments. They hardly buy any equity shares & instead like to buy gold, real estate, bank fixed deposits (FDs), PF (Providend Fund) and insurance. They need serious luring to bite the bait.

Given this framework, let us consider how the government thinks about the problem.
First, the government thinks it should time the sale correctly. This comes from the eagerness for success defined as selling the shares at the top of the market.

In reality, in waiting around for the right time, and rushing close to the end of the year, it often fails to meet the disinvestment targets.

Second, the government refuses to grasp the liquidity crunch its sale can trigger. Think of the Coal India issue in 2010, when it thought it got the timing right, but led the market collapse. As a large seller, it can not get both the right price and the large amount it seeks.

Third, it likes to cash in on the risk-averse investors' belief that what the government sells cannot go bad. If only it found a way to reach a large number of new investors, and lure them with price or tax discounts and the government tag, it would get the money. This is opportunistic and clever mis-selling, an evil it accuses others of.

Stripped of all the hype, a disinvestment is a sale of PSU shares, and investors who buy them should do so based on the merits and financials. The equity market is also a market for corporate control.
This means the performance of a company is not merely about its assets and profits, but also the management. If investors think that a change in management control of the business can lead to a better return on the assets, they use the voting rights attached to equity shares to effect a takeover or change in management.

PSU bank stocks..!

PSU investors do not have that right as the government remains the majority stake holder. Therefore, PSU equity is conceptually low in quality.

The government continues to talk about selling PSU bank stocks without ceding management control, while every discerning investor knows that change in management is precisely what these banks need.

In the current 2015-16 year, the government plans to raise Rs. 69,500 cr from disinvestment. The media interactions of the disinvestment secretary brings up a few interesting insights into what is likely this year

The secretary has indicated that the primary purpose of disinvestment is revenue raising. Therefore, the performance yardstick will be meeting that stiff target. She has also indicated that the problem seems to be on the demand side as the market lacks depth to absorb this quantity.

Proposal to increase number of Demat Accounts..!
Therefore, a proposal to increase the number of demat accounts on the lines of the Jan Dhan Yojana for bank accounts is being talked about. 

There is also mention of promotional activity that encourages investors to build wealth from equity investing. Such thinking is alarming.

Retail investors do not know the benefits of equity investing and thus miss out on the benefits of better return. But, does buying PSU equity shares serve that purpose?

Do not the retail investors deserve the best?

More so when they are first time investors?

The basket of companies that the government plans to sell is concentrated to mining and metal companies. These businesses are currently suffering from the global downturn & falling commodity prices. There is added uncertainty about the implementation of the new mining policy of the government.

The two large oil companies in the list are impacted by the falling crude oil prices & uncertainty about subsidies.

In most of the businesses that they operate, the PSU firms suffer high cost, low margins and low return on investment. How is this basket of poor quality stocks a good choice for the retail investor?
Won't these underperform the markets?

Won't large number of new investors lured by promotional campaigns suffer losses that no one can make good?

Or is the government hoping to appeal to the speculative instinct of the ordinary folk to meet its targets?
Or hoping that the “secular bull market“ everyone hopes for will take the good, bad & ugly stocks up anyway? It is tough to see any responsible selling in this exercise.

Even the mighty government will not be able to dictate the future direction of the equity markets. What is safe for a simple retail investor is a diversified portfolio of equity shares, which manages to weed out underperforming businesses.

The PSU ETF was a half-way solution in this direction, though it still runs the risk of sector concentration & management quality.

Retailing equity shares...!

 The government should ideally sell its stake to institutions, who will hold PSU stocks as part of a diversified portfolio that they sell to the retail investor. This they should do competitively, and not through phone calls to managing directors of PSU investment institutions.

Retailing equity shares of risky businesses is opportunistic & wrong in principle. It will lead to the common investors into owning shares of companies they know little about, fervently hoping to get lucky.

Or an equity cult that fosters speculation, not long-term wealth from equity investing.

About the author

Ms.Uma Shashikant is Managing Director at CIEL
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