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Besides, unlisted firms, such as Life Insurance Corporation of India, will now derive relatively lower value, given the poor experience investors have had with other PSU stocks. (Pradeep Gaur/Mint)
Besides, unlisted firms, such as Life Insurance Corporation of India, will now derive relatively lower value, given the poor experience investors have had with other PSU stocks. (Pradeep Gaur/Mint)

The great disconnect in the govt’s gigantic disinvestment programme

  • Govt looking to sell increasingly higher amounts of its stock at progressively lower valuations
  • Poor appetite for its stock has led to unusual strategies by the government to sell its stock

Aim high. You may still miss the target, but at least you won’t shoot your foot off," said American writer Lois McMaster Bujold.

But oddly, in the case of the government, while it’s been aiming higher and higher with its disinvestment targets, it may also have been shooting itself in the foot. In the past five years, the Centre’s divestment target of 3.84 trillion by selling stakes in public sector units (PSUs) was double the target set in the preceding five years. The government looks set to achieve about 83% of its target for the years between FY16 and FY20.

This may seem like a good outcome, but in the process, valuations of PSU stocks have fallen. The Nifty CPSE index has underperformed the Nifty 500 index by as much as 65% in the past 10 years.

While the market’s mantra has been to buy low and sell high, the chart alongside clearly shows that the government is looking to sell increasingly higher amounts of its stock at progressively lower valuations.

This obviously hurts the government because it is still sitting on paper worth over 11 trillion in listed firms, the value of which continues to erode by the day. Besides, unlisted firms, such as Life Insurance Corporation of India, will now derive relatively lower value, given the poor experience investors have had with other PSU stocks.

Graphic by Naveen Kumar Saini/Mint
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Graphic by Naveen Kumar Saini/Mint

To start with, the sharp increase in supply of paper of state-run firms has resulted in a drop in their valuations. Of course, performance of most of these companies has also left much to be desired, leading to poor appetite for their stock. This resulted in some unusual strategies by the government to sell its shares. Shares are being regularly sold at a discount using the ETF (exchange-traded fund) route.

Also, in recent years, to meet its targets, the government has asked some state-owned firms to buy its entire stake in other PSUs. For firms such as Oil and Natural Gas Corp. Ltd that have done so, their valuations have eroded further.

Salil Desai and Saurabh Mukherjea of Marcellus Investment Managers wrote in a blog post that minority investors in PSU stocks stand the risk of being short-changed by the government, which is not only a dominant shareholder but also often a major or sole customer.

Against this gloomy backdrop, there is, however, a glimmer of hope. Shares of Bharat Petroleum Corp. Ltd have risen sharply ever since the government said it has decided on a strategic disinvestment, wherein its entire stake will be sold to a private company. Clearly, both the Centre and minority shareholders will gain if the government chooses to privatize the entity instead of adopting other disinvestment methods.

As the saying goes, the business of the government is not to run a business. As long as the government aligns itself with this belief, it will end up creating more value for itself and the shareholders of PSU stocks.

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