PremiumSupply creates its own demand, says one adage by French economist Jean-Baptiste Say. But, in the case of government shares, supply is proving to be a nuisance for shareholders of public sector enterprises (PSEs).
The Nifty PSE index is down 22% in the past two years, as compared to a 16% rise in the Nifty 500 index. Stocks in the Nifty PSE are down between 15.2% and 41% in the past two years. Of course, the financial performance of firms run by the government is nothing to write home about, which is in itself a major reason for the underperformance. But an increase in free float is a concern as well.
A case in point is the Coal India Ltd stock, which is down 34.9% in the past two years. In a recent report, Motilal Oswal Securities Ltd cited continuous selling by promoters as a key concern on the Coal India stock price. “Government of India (GoI) has sold shares worth ₹34,110 crore (in the past five years), bringing down promoter’s holding to ~72% (from 90% earlier). This has been a continuous pressure on the stock performance amid overall weakness in the stock market," note analysts at Motilal Oswal in a note to clients.
Besides, the government’s aggressive divestment spree in these past two years has constantly kept the supply taps open in many PSE counters. The chosen route of divestment has been either exchange-traded funds (ETFs) or open market sales, or follow-on share offerings.
The sales are often lapped up because of a discount offered, although institutional investors typically hedge their bets by taking short positions in the derivatives market. Soon after allotment, the position is flipped (bit.ly/2GFs22t), and anecdotal evidence suggests the majority of the chunk of the incremental free float is held by retail investors, either directly or through investments in mutual funds or EPFO (Employees’ Provident Fund Organisation).
A recent Mint report said ETFs comprising PSE stocks have generated dismal returns for EPFO (bit.ly/2In50OB). The government’s aggressive disinvestment seems to be resulting in an egregious form of wealth transfer, with retail investors getting the short end of the stick.
As the chart alongside shows, the government’s shareholding in 18 PSEs has reduced from 67.6% in December 2016, to 61.1% as on December 2018. At the other end, mutual funds have increased their stake in Nifty PSE firms by 492 basis points to 7.2%.
According to analysts, there is a limit to how much the market can absorb the increase in free float. In many PSEs, the free float has increased by 10-34%, which can be a huge deterrent for the market. Next year, the government has bigger divestment targets. So, this will remain a hanging sword.
