Tale of two divestments

The good news is that Maruti’s initial public offer (IPO) of shares was vastly oversubscri-bed. Its stock market price has gone up to Rs 175 against a subscription price of Rs 125, yielding a handsome profit to small investors who dominated the issue. The bad news is that some people are misinterpreting this to mean that an IPO for other government companies is a good alternative to privatisation (sale of a controlling stake to a strategic buyer).

The Maruti IPO success has reportedly led to moves within the government to abandon the sale of a majority stake in the Shipping Corporation of India (SCI) to a strategic buyer, and to go for a public offer instead. That would defy logic. The two cases are completely different. Maruti Udyog was privatised some time ago, with Suzuki gaining management control. In the IPO, the government was simply selling its non-controlling stake. But for this, the market price would have been much lower. The Maruti sale was akin to the sale of the government’s residual stake in companies like VSNL and CMC, which have already been privatised.

By contrast, the Shipping Corporation of India (SCI) is a government-majority company, which had an IPO long ago, and is traded widely on stock markets. If the government goes ahead with the proposed sale of a controlling 51 per cent stake in the company, this will fetch a big premium over the existing market price, since the buyer will be willing to pay well above the market rate for control. I suspect the government will get well over Rs 100 per share, against the current price of Rs 68.

If, however, the government simply offers its stake to the public in a new issue, the price will crash. No buyer will gain control over the company, and so no control premium can be extracted from buyers. Indeed, the markets have long expected sale of a controlling stake, and part of that control premium is already built into today’s market price. This is why SCI is hugely overpriced compared with private sector rivals like Great Eastern Shipping. A standard way of measuring how highly companies are valued by investors is to look at their price-earnings ratio (P-E ratio). This is the ratio of the market price to earnings (net profit) per share. For Great Eastern Shipping, the P-E ratio is 5.8. For the Shipping Corporation of India, it is 7.1.

This is a unique case of a public sector company having a higher P-E ratio than its chief private sector rival. Typically it is the other way round. For instance, the P-E ratio is 5.2 for Indian Oil Corporation and 6.4 for Oil and Natural Gas Corporation, against 11.7 for Reliance Industries, the main private sector oil company. The lesson: If the government tries to sell a 51 per cent stake in the Shipping Corporation through a public offer, the price will crash. Before privatisation was proposed, the share price was as low as Rs 18 in the year 2000. But after a decision was taken to privatise it, the price soared as high as Rs 120. But then a series of onerous conditions (such as leaving majority control with the government) stalled progress. Many foreign and Indian bidders got disgusted with delays and withdrew.

Realising its error, the government then decided to sell a controlling stake of 51 per cent.

Unfortunately, it had lost so much credibility among international buyers that only one expressed interest, and even that one later withdrew. Three Indian bidders remain in the fray-Sterlite, Videocon and Essar Shipping. It is disappointing that foreign bidders have lost interest. But that is no reason to abandon the auction. The government has the right to set a reserve price, below which it will not sell. But if an Indian bidder offers a higher price, the government should accept it.

If instead the government opts for a public offer of shares, the first consequence will be a crash in share price, to well below Great Eastern’s current price of Rs 55. The signal will go out that the government wants to retain control, and that alone will sink this ship. Selling a majority stake to a strategic buyer will probably double the price that a public offer will.

I have long criticised BJP chauvinists (typically members of the Swadeshi Jagran Manch), who abhor foreign investment. But, amazingly, the BJP government now seems to be considering the other extreme. It is rethinking the privatisation of the Shipping Corporation because there are only Indian buyers, and no foreign ones. Mr Gurumurthy, I will for the first time support you if you rally the Swadeshi Jagran Manch against this proposal to discriminate against Indian businessmen.

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