Mumbai: The equity capital markets have been buzzing with activity this financial year. While Rs.9,443 crore has been raised through initial public offerings (IPOs) and there is a long queue of companies waiting to hit the market, another Rs.12,836 crore has been raised through qualified institutional placements, according to data from primary market tracker Prime Database. As companies (both listed and unlisted) scramble to raise equity while the window is still open, one significant entity is missing in action: the Government of India.
On 16 November, the Department of Divestment finally received around eight bids from investment banks to manage the offer for sale (OFS) of Coal India Ltd (CIL).
The deadline for submitting bids for Coal India share sale was extended thrice.
The first notice for bids for divestment in CIL was put out on 12 August which shows just how long it has taken the government to finalize the bankers. The second deadline was 1 September, which too was extended.
Also, so far this fiscal, the government has only managed to raise around Rs.12,642 crore through four divestment issuances, which shows that the government is likely to miss its Rs.41,000 crore divestment target, which may now be revised.
But why has the government been so tardy in raising funds from the equity capital market at a time when private companies are raising tons of cash?
One of the biggest reasons is the limited pool of quality firms that it can take to the market, say bankers. The problem facing the government is that most of the firms it had lined up this year for divestment are from sectors which are yet to see major economic recovery (for example, power). Others are from sectors that have been hammered by global factors (for example, commodities such as metals and oil).
“Other than Coal India Ltd and oil marketing companies (OMCs), there aren’t too many good companies with the government to raise money from,” said an investment banker, requesting anonymity. Even with the OMCs, investors are a little cautious given that deregulation of petrol and diesel is a recent phenomenon and oil prices are low. Investors are waiting to watch the full impact of these on the firms, said the banker quoted above.
Other large firms such as Bharat Heavy Electricals Ltd (Bhel) continue to struggle, given the woes of the power sector. “Outside of these firms, you are left with smaller companies, wherein the performance of most companies such as Shipping Corp. of India Ltd, Engineers India Ltd and others, is not encouraging enough to try a fund raise,” he added.
To be fair, even private issuances from these sectors are almost non-existent, so one can’t blame the government entirely.
Good apples and bad apples
Forget raising funds, the government has also found it difficult to generate interest among bankers to manage its proposed share sale, given the list of companies and their poor performance.
To ensure that investment banks queued up to bid for divestment issues, the government came up with the idea to bunch issuances and assign bankers for a basket of issuances. Any bank wanting to participate in any single OFS issue had to necessarily bid for the entire basket of five firms.
“What they did was essentially clubbing the bad apples with the good ones…making banks bid for even firms they were not keen on,” lamented another investment banker, requesting anonymity.
The strategy didn’t really succeed.
On 16 August, the government appointed banks for two baskets of five companies each. Only one foreign bank (Deutsche Bank) participated in the bids. For the first basket comprising of Oil India Ltd, Container Corp. of India Ltd, NMDC Ltd, MMTC Ltd and ITDC Ltd, only three banks put in bids. All three were appointed for the basket. These bids were later scrapped due to poor response and the government is now in the process of inviting individual bids for divestment issues in these firms.
But bankers, it seems, are not keen on bidding for these divestment issues, as deals are aplenty in the market. Besides, government issuances are notorious for being low on fees.
Given the above factors, the CIL divestment issuance has become all-important for the government. The stake sale in CIL could fetch the government around Rs.23,000 crore.
This is the only decent chance the government has to reach anywhere close to its target.