Divestment drive may breathe life into market

Mumbai: India’s equity capital markets could see a revival around the fourth quarter of this calendar year (October-December) if the government goes ahead with reforms as it is expected to, according to investment bankers who are looking forward to at least half-a-dozen initial public offers, or IPOs, follow-on offers, or FPOs, and strategic stake sales in state-owned companies.

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The deals, expected before the end of the current government’s term in office, include pending IPOs such as those of railway consultancy RITES Ltd, hydropower player NHPC Ltd and Oil India Ltd, and will also serve as an additional source of revenue for the investment banks themselves.

In the first four years and two months of its rule, the United Progressive Alliance, or UPA, government could not sell its stake in state-owned firms, even through IPOs, because one of its key allies, the Left Front, was against these. The Left Front withdrew support to the government over the Indo-US civilian nuclear deal (the government wants this while the Left Front doesn’t), and the UPA subsequently won a trust vote in Parliament.

Also on the cards this year are follow-on offers from companies such as NMDC Ltd, NTPC Ltd, Bharat Heavy Electricals Ltd (Bhel), and the sale of the government’s residual stake in firms in which it has already divested a majority or controlling stake such as Bharat Aluminium Co. Ltd (Balco), Hindustan Zinc Ltd and Tata Communications Ltd (formerly Videsh Sanchar Nigam Ltd).

Every investment bank here is eager to clinch the mandate to manage two bulge-bracket IPOs that are in the offing—telco Bharat Sanchar Nigam Ltd, or BSNL, and Air India, which has been merged with Indian Airlines to form National Aviation Co. of India Ltd, the country’s largest airline company.

“Even if these two big IPOs (BSNL and Air India) do not happen, the pending offers and follow-on offers are expected towards this year-end," said the head of investment banking at a foreign brokerage in India. He didn’t want either himself or his firm to be named.

NHPC’s initial public offer is expected to raise at least Rs1,500 crore, while that of RITES could raise around Rs400 crore.

“The government needs money," said the chief executive of a large Indian investment bank, but he doesn’t expect the government to push too many deals before its term ends towards the middle of next year, when parliamentary elections are due. The executive did not wish to be named.

Money from the stake sales will come in useful for the government, which is trying to control its fiscal deficit which has soared because of populist programmes.

“The priority will be on the pending IPOs," said Chetan Savla, executive director and head of equity products at Kotak Mahindra Capital Co. Ltd.

The volume of deals, including IPOs, was much higher when Sensex, India’s 30-stock benchmark index of Bombay Stock Exchange, was trading at 6,000 levels, since the market was rising, Savla added.

The Sensex more than tripled since then to hit a peak of 20,873.33 on 8 January. But it has lost more than 30% this year, falling to its lowest level in 2008, 12,575.80 on 16 July.

On Wednesday, the benchmark index rose 495.67 points, or 3.6%, to close at 14,287.21.

Not one equity capital market deal has been reported from India thus far in July, including IPOs, qualified institutional placements (QIPs, where shares are sold to banks and other financial institutions), and issues of foreign currency convertible bonds (FCCBs) or depository receipts, according to monthly deal data from Thomson Reuters.

Analysts expect that to change because they anticipate 8-10 months of a pro-reforms administration, after the Congress-led UPA government won the trust vote in Parliament on 22 July.

Still, if the government wants to sell shares in state-owned firms it will have to shorten or waive the long processes usually associated with divestments or stake sales in such companies.

There have been instances of reformist governments doing away with lengthy procedures, said bankers, referring to the floats of the country’s biggest explorer, Oil and Natural Gas Corp. Ltd, GAIL (India) Ltd and Indian Oil Corp. Ltd in 2004.

There could be a similar hurry this time, said the head of equity capital markets at a large local bank. “These are long pending deals. Whether these happen or not completely depends on the government’s willpower," the banker, who did not wish to be identified, said.

Many bankers say the government will complete, before December, the sale of its residual stake in companies in which it has already sold a majority or controlling stake.

The bankers, however, differ on how the government will do this.

The investment banking head of a large Indian bank said the government could consider the so-called “French Auction" method that it used to sell its holding in Maruti Suzuki India Ltd, the country’s top car maker.

The Indian government defines a French Auction as one in which shares are allotted at the “bid" prices or prices that have been bid by various buyers.