Take the share price of the National Thermal Power Corporation (NTPC), for instance. The price is hovering around Rs. 217. It enjoys the profit-earning (PE) multiple of 22. If one applies the usual formula of price fixation in the case of bulk issue of a company share already listed and traded in the market, a fresh five per cent government disinvestment in NTPC will bring its share price down to Rs. 180 or even less. To make the share offer attractive, the recommended price band for NTPC stocks could be just around Rs. 160-170 per share. However, if NTPC shares enjoyed the same PE ratio (above 59) as in the case of Reliance Power or CESC, it should have now commanded a market price of Rs. 580 per share and the sale offer for the government disinvestment could have ranged within a price band of, say, Rs. 460-480.

Given the NTPC'S current price rating in the market, the government may be obliged to make the NTPC sale offer at best at Rs.170 per share. If this is not distress sale, then what is it? At such a low price band, the government stands to lose huge sums from the NTPC stock sale alone. The purpose of government stock disinvestment in PSUs to raise substantial funds to finance fiscal deficits in the budget will only be marginally served. The real beneficiaries of the NTPC stock sale will be private investors, including foreign institutional investors (FIIs), mutual funds and speculators, as post-divestment prices of NTPC shares will certainly appreciate substantially.

The same logic applies to the disinvestment of government shares in Steel Authority of India Limited (SAIL) and other listed PSUs. SAIL shares too are heavily traded in the market. These shares, currently quoted at around Rs. 180, are also highly underpriced if compared with those of Tata Steel, JSW Steel and Jindal, etc. A fresh government stake sale in SAIL may hammer down the public offer price of SAIL scrips to the level of Rs. 130. SAIL enjoys a PE ratio of 12 compared to JSW's 46 and Jindal's 21. The price of JSW Steel shares is ruling at around Rs. 800 a piece. Jindal's is traded at around Rs. 680. The market price of shares of Tata Steel, which showed a very poor second quarter performance this year with the sales income itself dipping by over 16 per cent and net profit dropping even more sharply by 49 per cent, was close to Rs. 550 until the financial results were out on October 27. If the normal market criterion is applied to SAIL shares, the latter should be priced at around Rs. 350 or more. That would have allowed the government stock disinvestment fetch about Rs. 270-290 per share.

Both NTPC and SAIL are the largest Indian companies in their respective industry segments. In fact, most PSUs are in their respective industry segments. NTPC is one of the world's top thermal power generating companies. It is extremely well managed, operating at a high plant load factor (plf), above 80 per cent, despite the poor quality of Indian coal. The power generation cost is among the lowest. SAIL is the largest integrated steel company in India having the widest range of products. The government had invested huge amounts in both NTPC and SAIL by financing their project costs over many years. The cost of projects was equally split as equity and debt. This has automatically enlarged the equity base of both NTPC and SAIL in gigantic proportions over the years until the government stopped the practice under a new dispensation. Historically, all major public sector companies have been capital intensive. And, the constant capitalisation of large portions of debt into equity made them equity heavy companies, affecting the capability of earning per share (EPS).

It will not be in the interest of either the government or the public, the real owner of the PSUs, to disinvest their shares even at current market prices which are not only low but also don't reflect their true future market potential. Such a sale will benefit market speculators and short-term operators more than the government or the public. The Standing Conference on Public Enterprises (SCOPE) is believed to have already advised the government against a crowding of PSU sale offers in the market so that the government realizes maximum value out of the disinvestment of PSU shares. SCOPE chairman Arup Roy Chowdhury and his colleagues in the apex body of the public enterprises are working closely with the government with regard to the PSU disinvestment schedule and other connected issues.

The government must apply its mind on the pros and cons of equity restructuring of some of those equity-heavy PSUs before putting its shares on the block. Ideally, these companies should be allowed to convert a substantial portion of their subscribed equity capital into either 'zero' interest or a very low interest long-term bonds to keep the equity capital low. The government should also allow cash-rich PSUs to either buy back shares from the market or acquire shares through a special rights' issue for the purpose. The idea is to allow PSUs also hold some shares in their respective companies alongside the government, the original promoter. A pre-issue stock option to all employees too may be seriously examined.

It is true that such a capital restructuring in listed companies involving equity conversion into debt at this stage will immensely benefit the existing shareholders of those companies. But, this can be ignored since the number of such shareholders is very small now with the government exercising overwhelming equity control over these companies. The matter is worth looking at in the broader and long term interest of the large PSUs where the current government holding is 85 per cent or more. The capital restructuring will allow the government to realize the true value of its shares from the phased disinvestment exercise, now and also in the future. The government should also examine the aspect of allotment of shares to ensure that they are not cornered by any business group or its nominees, which will have a future implication on the pricing of PSU shares. The government disinvestment in PSUs should help professionalise their corporate management and not indirectly help ignite the ambition and passion of a few private monopolies run by business families to cheaply grab high-value public enterprises. (IPA Service)