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
No comments:
Post a Comment