Will the government succeed in meeting its divestment target of Rs.30,000 crore for this fiscal year? According to the Vijay Kelkar committee, “Given the subdued equity market conditions…a conservative estimate for disinvestment receipts, if no policy interventions are made, would stand at around Rs.10,000 crore.”
The panel has recommended four policy interventions to improve the chances of meeting the target—a) to issue call options with shares of state-owned firms as the underlying asset; b) to launch an exchange-traded fund (ETF) made of public sector stocks; c) to dispose minority government holdings in private companies such as SUUTI, Hindustan Zinc Ltd and Bharat Aluminium Co. Ltd (Balco) and; d) government-owned companies with a large cash balance must either invest surplus funds this fiscal, or distribute it as dividend.
The ETF idea has floated around for a while, but has gained momentum recently. Earlier this month, the department of disinvestment issued a request for proposal to engage an advisor for the launch of ETF of public-sector units. It will select the advisor in October. Will the ETF route help the government raise more funds vis-à-vis issuing shares of individual companies?
ETFs bring with them the benefits of diversification at a lower cost. But at the same time, there will be a set of informed investors who will not be interested in the basket of securities the government is offering but may be interested in some of the individual stocks in the basket. Additionally, subdued market conditions will impact the issuance of ETFs in the same manner as they impact individual stock issuances. In the past five months, only Rs.400 crore has been raised through a handful of new equity fund issuances by mutual funds. In sum, one can’t expect ETFs to be a game-changer as far as fund-raising for the government goes. Having said that, it is a good additional tool to use and attract investors who may not be keen to participate in individual stock sales.
The call option model, under which the government can sell call options on a regular basis for different securities, is an interesting recommendation and can help the government raise funds even in difficult market conditions. Buyers of call options aren’t obligated to buy shares and can let the option lapse if the market price of a stock moves unfavourably. This feature will address concerns that the price of a stock may fall soon after an equity issuance.
But whatever mode the government uses, it must realize that it needs to be flexible with pricing and offer a discount to the prevailing market price. The bad experience with the Oil and Natural Gas Corp. Ltd (ONGC) issue, which was priced at a 2% premium, makes it amply evident that investors are sensitive to pricing.
In fact, at the right pricing, even the existing offer for sale window will attract large investments.
As far as the target for this fiscal is concerned, it could be easily met if the government manages to sell its stake in Hindustan Zinc and Balco. Thankfully, there is some progress on this front, with the Vedanta group having recently increased its offer for buying out the government’s stake in these two companies. Vedanta’s current offer for the two firms works out to Rs.20,700 crore at current exchange rates. Special dividends from PSU companies will also help bridge the gap.