Indian government targets have always been ambitious, to say the least. Last year, the government got nowhere near its $9bn divestment target and despite shrinking this by a third, this year’s $6bn goal will still be tough to reach.
This week did at least see the state take a step in the right direction when it sent banks RFPs for three divestments. But its plans elsewhere ensure these deals will have a lot of competition.
This is because Indian investors will also be called upon to soak up billions of dollars of supply from companies that need to increase their free floats ahead of a deadline of June 2013 set by the Securities and Exchange Board of India (Sebi).
This could be a tall order, after investors saw the stock market plummet by around 25% last year.
All government-controlled companies will need to increase their freefloats to a minimum of 10%. But that is not all: private sector firms will need to make a far greater leap to 25%.
Bankers estimate that achieving these levels will involve $5bn-$6bn of ECM deal volume before the June deadline. That, combined with the government divestment target ― some of which is included in the freefloat figures ― means that more than $10bn worth of deals need to be priced in the next nine months.
At first glance, volumes achieved so far this year make this look almost achievable. Around $9bn has been priced, according to Dealogic. But 75% of this happened in the first three months of the year, when India was in a bull market.
Deals in the right sector are likely to get demand. After all, India’s financial institutions have already proved there is strong domestic demand for their equity raisings. But in the government’s pipeline are companies operating in sectors that are relatively unloved at the moment: infrastructure, power, utilities, commodities and real estate.
In fact, half of the top 25 companies needing freefloat increases are from real estate, infrastructure and energy companies. ECM bankers say these are the toughest sectors to sell at the moment.
OFS will not help
Sebi has introduced new measures for company promoters and sellers to use in order to sell stock efficiently, most prominently the offer-for-sale (OFS) structure for secondary sell-downs. After some early hiccoughs, this is now starting to be accepted. But bankers argue that a fancy new selling method will not be able to generate demand where there is none.
To fix that deeper problem, the government needs to address some of the regulatory issues plaguing investors in these sectors and restore confidence in the country. A recent government-appointed committee recommended the deferral of General Anti Avoidance Rules, putting aside new tax legislation that has scared off foreign investors.
That was a step in the right direction. But in light of the government’s large, and somewhat urgent, divestment target, Sebi might still have to relax its freefloat deadline.
The Indian government should be applauded for its bravery, but it may be asking for too much this time. The divestment target may be achievable. And the freefloat target may be achievable. But attempting the two together will make for a very difficult year for government officials, ECM bankers — and the country’s investors.