The disinvestment of public sector undertakings (PSUs) has usually lurched from one controversial strategy to another. It started in 1991 with the strange decision to bunch PSUs into packets and auction them. The auction was compromised; banks fronted for brokers in the market madness that led to the Harshad Mehta scam of 1992. Later, disinvestments were marred by funny pricing, inefficient investor service and strange business decisions, such as not to pay merchant bankers to the issue.
But as the government gets ready to raise Rs30,000 crore through disinvestment of PSU shares, its biggest worry ought to be something quite new—the vanished retail investor. The situation has reached a point where a sensible government and its regulators would have been in a panic—if they weren’t busy issuing ill-considered diktats, fighting turf battles or protecting personal interests. Meanwhile, India’s investor population has plummeted from the claimed 20 million (probably exaggerated) in the 1990s to eight million (according to the Swarup Committee report of 2009), and is probably even smaller in reality.
The retail investor is fast becoming extinct, and this is not due to any deliberate policy to encourage individuals to invest only through mutual funds. In fact, the mutual fund industry is in an even bigger turmoil after the Securities and Exchange Board of India’s (SEBI) hasty move to scrap entry loads without a proper debate. The decision has seen over Rs7,200 crore flow out of equity funds since August 2009, and more will vanish if corporate investment is taxed in the forthcoming Budget. The extent of investor apathy is best reflected in the retail response to initial public offerings (IPOs) and follow-on issues.
Traditionally, Indian investors have always entered the capital market through IPOs, because they were reasonably assured of an attractive price and returns. The spate of FERA (Foreign Exchange Regulation Act) dilution measures in the 1970s and the primary market boom of the 1980s (when the Controller of Capital Issues kept offer prices low) was a boon for investors. But it has been downhill since the post-1991 liberalisation programme. The biggest exodus and disenchantment happened in the 1992-96 period when thousands of companies vanished into thin air.
The dotcom bubble of 1999-2000 was the next blow. Investor confidence was just starting to revive after the monster bull run of 2004-08, when we saw another phase of excesses leading to the crash of 2008. Here again, greed and the unholy nexus between companies and investment bankers destroyed investors’ wealth. As Moneylife Digital pointed out, over 80% of the issues of 2007 continue to be traded below their offer price.
All this is reflected in retail subscription patterns in all the recent IPOs. Consider this. MBL Infrastructures, Godrej Properties and JSW Energy received a pathetic 0.3% subscription in the retail segment. Godrej (priced at Rs490 a share) received 18,300 retail applications and 50 from HNIs (high networth investors) for its December IPO. JSW Energy (Rs95) received 86,559 retail applications and just 97 from HNIs. MBL Infrastructures received just 3,616 retail applications (in end-November 2009 at Rs180) and just 29 applications from HNIs. DEN Networks (Rs195), an associate of Network18, received 3,916 retail applications and 50 from HNIs at the end of October 2009. Aqua Logistics, which was to close on 2nd February, revised its price band downwards and extended the date after failing to attract investors. The involvement of retail specialists such as the Enam group and also HT Media didn’t help its case. These numbers suggest that many IPOs just ‘managed’ to scrape through with help from friendly intermediaries.
Disinterest of employees is another feature of many IPOs. If employees are unconvinced about a company’s pricing and prospects, how can it attract others? The employee segment of MBL Infrastructures received only 26 applications (0.12% subscription); Astec LifeSciences received 55 employee applications (0.5% subscription), while Euro Multivision had an embarrassing 16 employee applications (0.3% subscription).
Subscription patterns also suggest some dubious goings-on. For instance, why is it that some issues, which manage high retail subscriptions, are shunned by qualified institutional buyers (QIBs)? And how is it that some IPOs see ridiculous oversubscription from QIBs but leave retail investors and employees cold? Has SEBI studied the ‘de-marketing’ (new market terminology) of certain IPOs and whether the advice to ‘avoid’ them is based on proper research? How then do these IPOs get past SEBI’s multiple rounds of questioning?
Thinksoft Global is a good example. Its retail segment was oversubscribed 3.8 times, but saw only 79 HNI bids (for a huge 4.18 times subscription) and just three QIB applications (just 0.31 times subscription). Astec LifeSciences (4 November 2009; Rs82) scraped through because of 2.28 times subscription from retail investors (just 7,022 applications); every other category was undersubscribed. Euro Multivision (24 September 2009; Rs75) registered 1.7 times oversubscription in the retail segment, although there were only 7,382 applications; but it had just five institutional applications and 112 HNI applications.
Even in successful issues, the retail application numbers are pretty low if one assumes that India really has eight million retail investors. Cox & Kings (20 November 2009, Rs330), after an advertising blitzkrieg, got under 50,000 applications and the retail segment was just short of full subscription. The HNI segment was apparently oversubscribed 10 times, but received only 212 applications. Pipavav Shipyard and Indiabulls Power (Rs45) were considered big issues with 15.7 and 6.87 times subscription, respectively. Pipavav got 90,099 and Indiabulls got 115,221 retail applications. Infinite Computer Solutions (13th January; Rs165) received 123,786 retail applications while DB Corp, another ‘success story’ with 32 times total oversubscription, received just 72,868 applications and 3.3 times oversubscription in the retail segment.
Is there a conspiracy of silence over the vanished retail investor? How is it that it does not make daily headlines? A convergence of vested interests ensures this. A dwindling investor population reflects SEBI’s failure in market development which is enshrined in the Preamble to its Act. For the media, it is a matter of commercial interest. Big newspapers charge a few lakh rupees for IPO advertisements touting a circulation of millions of copies. How is the spending justified when IPOs receive less than 4,000 applications nationwide?
The stock exchanges, too, are uninterested in highlighting investor apathy. They are happy enough to deal with institutional investors, so long as tens of thousands of scalpers and arbitrageurs drum up huge trading volumes in the hunt for tiny returns. This lack of policy and direction only creates a hollow and illiquid market that is volatile, extremely vulnerable to foreign portfolio investment and susceptible to easy manipulation. Any decent capital market needs a strong domestic retail base either through direct investment or through mutual funds; otherwise we are destined to learn some hard lessons in the future. The government needs to wake up before greedy private sector companies and their unholy nexus with market intermediaries destroy investor sentiment once again.
Delivering the Purshottamdas Thakurdas Memorial Lecture in Mumbai recently, Dr Vijay Kelkar (chairman of the 13th Finance Commission) offered a sensible game plan. He said that the disinvestment policy must be "mindful of its ramifications to the political economy; it must have multiple goals rather than a narrow focus on maximising proceeds." Very correctly, Dr Kelkar advocated dispersal of share ownership among "crores of households" to ensure dispersal of wealth and to create "a middle-class constituency" which has a stake in the profits of PSUs.
In fact, dispersal of share ownership, as suggested by Dr Kelkar, probably has to be the centrepiece of the disinvestment policy if the government wants to avoid the embarrassment of a much-hyped and ostensibly vibrant capital market which is almost bereft of retail investors.