PSU Disinvestment

How to make a success of it in this financial year…

The government in its February Budget has again set an ambitious target for divestment of PSUs. Rs. 72,000 crore ($11 billion) may appear to be steep by historical standards, but it is not too hard to achieve. Two years back, the government could achieve just about 40% of its disinvestment target due to weak market conditions. A lot has changed since then. Here are 3 steps the government can focus on to make a success of divestment this year…

Focus on the stories that sell… 

If the success of this financial year’s first divestment in NALCO is any indication, the government needs to focus on stories that sell. Consider a few samplers. No point in trying to divest oil producers like ONGC and OIL at a time when upstream oil is hardly attractive to investors. On the contrary, the focus should be on downstream stocks like IOC, HPCL and BPCL that can elicit demand considering the favorable regulatory environment. Similarly, power producers may not attract interest, but power aggregators like Power Grid and power financers like PFC and REC will definitely elicit interest from investors considering their low cost of funds. Metals and minerals is one more area that the government can focus on as investors will be keen to buy these stocks considering the strong metal prices in the global commodity markets. Of course, selling PSU banks may be the harder part of the challenge!

Give it an attractive pricing… 

One of the key lessons that the government has learnt in the past is that attractive pricing is the key to making any divestment a success. In the early part of 2000s, the government divestment program began in right earnest with Maruti. The attractive pricing and the subsequent appreciation actually triggered off the massive buying interest in PSU stocks. That was followed by a series of PSU banks; each of them priced at an extremely attractive level. That, probably, holds the key to the success of the program. The first divestment in NALCO was done at a discount of nearly 10% over the market price, which attracted a lot of retail and institutional interest. 

Avoid bunching of divestments…

Back in 2004, the government had planned the divestment of ONGC along with a few others. The issue size was huge and sucked out most of the liquidity from the markets. This resulted in a fall in price post listing. This is a normal problem when too many divestments are bunched together. Markets in 2017 are substantially deeper and broader with greater participation. However, bunching should still be avoided in the larger interest of post-listing performance. The government has done the right thing by starting early this year. The trick now is to phase it out gradually through the year. ©

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