India has consistently fallen well short of its divestment targets. It was only during fiscal years 1991-92, 1994-95 and 1998-99 that it managed to meet the objectives it set during annual budgets, according the Department of Divestment.
With such a shoddy track record, it comes as no surprise that the new government, under the leadership of Prime Narendra Modi, is hoping to turn things around for the country.
On September 10, the Cabinet Committee of Economic Affairs approved stake sales in three state-owned companies: Coal India, NHPC and Oil & Natural Gas Corp. The government owns 89.65%, 85.96% and 68.94% in the three groups and is offloading 10%, 11.36% and 5% respectively of each of the companies.
Based on market capitalisation at the time of writing, the planned divestment from Coal India will net the government a whopping Rp221.5bn ($3.6bn), while the figures for NHPC and ONGC are Rp26bn and Rp175.3bn. Together, this adds up to almost 70% of the Rp584bn target for this fiscal year.
Selling stakes now in state-owned companies certainly makes sense, coming when India’s equity market is enjoying a period of strong growth. Year to date, the Nifty gave investors returns of around 28%. In contrast, the Jakarta Stock Exchange returned 22% year to date, while the Hang Seng Index delivered only 7%.
Not only that, but the Securities and Exchange Board of India made it mandatory in June for all public sector undertakings — as publicly owned companies are called— to have a minimum float of 25%. Previously they could get away with listing just 10% of their shares.
The change in rules means many more groups are also expected to come to the market. The government has already held roadshows for a 5% sale in Steel Authority of India Ltd (Sail), with the deal slated to launch sometime this month.
All in good time
So far so good. But the fact that India is divesting only small portions of its holdings has raised the hackles of many, who reckon the government is not being quick enough to bring down its fiscal deficit of 4.5%. According to them, India should take full advantage of the window of opportunity now before market sentiment changes.
For example, the government needs to reduce its holding in Coal India to under 75%. But even after the upcoming sale, it will hold close to 80% of the company. So why not just offload it in one go rather than spread the divestments over a number of years?
Rushing to market would be a mistake. The equity market struggled to generate much activity until the new government came in, meaning unloading huge government stakes runs the risk of overwhelming investors and crowding out the private sector.
By going slow, India ensures a strong pipeline for the next few years, which will help ECM activity, giving investors assurance that there will be consistent supply, and that the good conditions today are here to stay.
Now that India is on the right track, there is no need to rush.