BOMBAY, 14 July 2003 — It is indeed after a long time that there hovers a halo of optimism over the Indian capital markets. Booming secondary markets and Maruti Udyog’s highly successful primary issue have once again raised the interest levels of investors.
Foreign institutional investors (FIIs) have poured a lot of money into the Indian markets over the past two-three months on hope that a good monsoon would boost growth in one of the world’s fastest growing economies. FIIs pumped in over Rs.32 billion into Indian stock markets in June, taking their net investment in the first six months of 2003 to nearly Rs.60 billion. And now the markets seem to be getting ready for more excitement and the impetus has come from the government of India. The much awaited meeting of Cabinet Committee on Disinvestment (CCD) took place during the week and the most surprising aspect of the meeting was that a concrete decision was made, finally.
The CCD cleared the way for sale of government’s residual equity in aluminum producer Balco, long distance call carrier VSNL, petrochemicals company IPCL, IT company CMC and oil marketing company IBP through the offer for sale route. And this taking of the IPO route has obviously been prompted by the whopping success of the Maruti IPO. The government privatized all these five companies through the strategic sale route and the presence of strong strategic partners is expected to attract a rousing response from the public when the shares are sold. The initial public offering, IPO, for reducing government’s existing stake in five PSUs will take place within six months.
The CCD has decided to let strategic investors hike their stake to 51 percent. The rest of the stake is to be sold in the market. In IPCL, IBP and VSNL the strategic partners are yet to consolidate their holdings to 51 percent. Reliance holds a 46 percent stake in IPCL, Tatas 45 percent in VSNL and IOC 33.58 percent in IBP. The strategic partners have the first right of refusal — they will get the first chance to buy shares from the government to raise their stake to a majority 51 percent. There is no doubt that government would ensure that the strategic partners will be able to take their shareholding to 51 percent at least. This will perhaps be done through off-market deals at a price as per the Securities and Exchange Board of India (SEBI) guidelines. In return, the partners will have to agree to forgo the right of refusal. The government is also reducing its 34 percent stake in Hindustan Petroleum Corporation Limited, (HPCL) and bidders seem have already started lining up. Fertilizer cooperative giant IFFCO is eyeing a pie in HPCL. IFFCO, which became a fully autonomous cooperative institution after the government’s equity was reduced to 41 percent from July 1, is seeking an alliance with Royal Dutch/Shell and Kuwait Petroleum Corporation, KPC, for putting in a joint bid for HPCL. As part of bid condition, suitors are allowed to take partners till the stage of submitting a financial bid. IFFCO could not bid for HPCL as government policy bars public-sector firms from being part of the disinvestment process.
The CCD also cleared transaction documents for disinvestment of Hindustan Copper and National Fertilizers, and also approved a proposal for offloading majority stake in Mineral Exploration Corporation Ltd. (MECL). Though the government is selling its entire equity holding of 98.95 percent in Hindustan Copper, the transaction documents stipulates the appointment of a government nominee director on the board of Hindustan Copper for a period of three years. This is to ensure that the affirmative assent of the government director would be necessary for sale of assets, transfer of mining lease, company restructuring and sale of shares by the strategic partner. A 20 percent stake in Dredging Corporation is to be divested through an initial public offering, IPO, as in the case of Maruti. This will now pave the way to call for financial bids to wrap up the sale of the company. This company is already listed with 1 percent stake held by the public. Therefore, the government cannot put it on the block for strategic sale. And hence the only option for the government is to go for an IPO. The proceeds from the IPO will go to the government and an equal amount will be made available to the company to buy new machinery.
Before exiting from National Fertilizers, the government will make a dividend payout from the company to the tune of Rs.3 billion to itself, out of a total reserves of Rs.8 billion. The companies in the fray for acquiring a controlling stake are Tata Chemicals, Zuari-Chambal and Indo-Gulf Corporation.
Well, it certainly looks like in the coming months, the India capital markets will buzz with a lot of activity and one only hopes that the current run of optimism continues.