It is another attempt by Indian Government to diverse the profit making company, Coal India Ltd. (CIL) which had a net profit of Rs. 9,622.45 crore on total income of Rs 52,592.29 crore (source: “Coal India RHP to be filed next week”, September 24, 2010)]. It was reported, “as per the Draft Red Herring Prospectus (DRHP) filed by the company with SEBI, CIL will offer 631,636,440 shares with a face value of Rs. 10 each [Source: “CIL to file final papers for IPO tomorrow” (i.e. on September 27, 2010), September 26, 2010].
It is really astonishing to hear the news. Some of the market analysts felt that the move clearly demonstrates a situation where the Indian Government is rushing into where the angels fear to tread, particularly with respect to divest the profit making and Government controlled organization such as CIL.
This news has come up at such a time when Indian investors have not yet forget the scars created on the face of Indian share market and in the minds of Indian investors in the way of divestment of Indian Petrochemicals Corporation Ltd. (IPCL) that involved the “so-called” ‘joint and subtle’ actions of Indian Government joining hands with Reliance Industries Limited (RIL).
Earlier in February 2004, the newspaper, Indian Express mentioned, “The public offer for the shares of Indian Petrochemicals Corporation — which was taken over by the Reliance group — was oversubscribed on Day One itself.” It also reported, “In fact, the investors placed almost all the bids at the floor price of Rs 170 in IPCL which is at a significant discount to the current market price of Rs 196, according to data available with the NSE.” [Source: “On Day 1, IPCL issue oversubscribes 110%”, February 21, 2004]. However, in the subsequent period, the share price was dropped below Rs. 156. In this respect, B. Krishnakumar of Hindu Business Line opined, “A drop below Rs 156 would impart weakness and the stock could drop to Rs 140-143 range subsequently. Hold with a stop-loss at Rs 155” [Source: B. Krishnakumar, “Query corner”, May 1 2005].
However, during the initial process period of nearly 6 months, IPCL had sent the share applications to investors (who were already allotted a minimum of 100 shares) asking them to further pay an amount of Rs. 6000 so that their individual total investment would reach Rs. 23,000 and each individual investor could get extra 200 shares. It means that the investor who bought 100 shares would possess a total of 300 shares in IPCL merely by paying an excess amount of Rs. 6,000 (totaling their investment to Rs. 23,000). There was one more crucial condition to be noted in the new share application that was sent by IPCL to the investors. It was mentioned in the share application that the 200 extra shares of the individuals who are not willing to pay an excess of Rs. 6,000, would be transferred to Reliance Industries Ltd. (RIL), an Indian company that was seriously pursuing the options to buy IPCL. It made RIL to gain a hold on IPCL, which in turn restricted other corporate investors to buy IPCL. Some of the market analysts felt this move as part of strategic investment by RIL, subtly supported by the Government of India.
As the high drama in the market was going-on, it was realized by the investors that ‘The Government is fostering a number of myths to justify its disinvestment programme’ benefiting itself as well as the buyer, RIL. [Source: Prabir Purkayastha, “IPCL Disinvestment By Prabir Purkayastha”, March 29, 2008].
Even the individual investor felt that the issue of shares at Rs. 170 itself involved some sort of misappropriation. Earlier the shares were issued at Rs. 170 per share. It means, for 100 shares the investor had to pay an amount of Rs. 17,000 and for 300 shares, the actual amount to be paid by the investor should be Rs. 51,000 (170 X 300). But IPCL had issued all 300 shares merely for Rs. 23,000 (Rs. 17,000 + Rs. 6,000 additional amount). It means that the value of each share was drastically readjusted to Rs. 76.66 ps per share. (23,000 ÷ 300). Further calculations show that the investor had actually paid Rs. 7,666 for 100 shares and the remaining amount of Rs. 9,334 (Rs. 17,000 – Rs. 7,666) was actually subsided in the excess 200 shares that were said to be issued by IPCL to the individual investors. The clause that the 200 shares of individual investor who was not willing to pay the excess amount of Rs. 6,000 would be transferred to the account of RIL, made individual investors lose the amount of Rs. 9,334 for those remaining 200 shares.
Thus, according to Pratyush, a blogger, “After the merger, Reliance’s revenue will be increased from chemicals by 4 per cent to 48 per cent of the total. Later, analyst (Kenin Jain) said that one share of Reliance will be equal value of four shares of IPCL. But, according to the book value formula the ratio would be 1:2. Reliance Industries would add more than Rs 11,000 crore in its balance-sheet and Rs 1,163 crore to its profit as well” [Source: Pratyush, “IPCL's merger with Reliance Industries would add Rs 11,000 crore in RIL's balance sheet”, March 7, 2007].
However, it was unknown where actual amount of Rs. 9,334 belonging to the 200 excess shares of investors had gone. This matter was subtly dealt with the investors who were allotted earlier 100 shares, but not in the public. After a long time all this issue created a nightmare when all other investors including those who were not allotted earlier 100 shares came to know about this high-drama in the market.
Market watchers opined that when a company goes for public issue it might be for its further development or expansion. But in IPCL case it went for public issue and sold the public entity to RIL. They questioned the rationale behind the entire activity. They questioned the entire process saying that when the company is in profit, what was the need for the Government to sell it off, that too immediately after the public issue?
Another key issue was, as mentioned by Prabir Purkayastha, “The earlier valuation of IPCL shares suggested that 25% stakes in IPCL can be sold at a share value of Rs.160. The valuation done by the Working Group on Disinvestments — A Case Study of IPCL — based on replacement costs showed then that it should be at least Rs.265. If we take into account that with 25% share the “partner” was to be handed over control, the share value, purely by normal commercial practice, should not have been less than Rs.500 per share”. If the words of Prabir Purkayastha are to be taken into concern, then, what was the need for the Government to sell IPCL at Rs. 231 per share [Source: Shuaib M. Fakih, “Acquisition of Ipcl By Reliance”, December 29, 2006], when they were actually valued at Rs. 500 per share? Is it mean that Indian Government had favored the highly popular private companies in India like RIL or is it to reduce the loss by the Government against the sales to boast that it made a great deal?
This entire episode had shattered the faith among the investors with respect to the Government policies towards investment in Government-owned public companies. They were afraid of investing in any public company that was planned to be divested by the Government.
Coming back to the CIL issue, is it the same thing that’s going to happen in future? Is it going to create the same kind of another nightmare in the minds of investors, particularly the Indian individual investors? Let the time decide and let the investor think logically and intelligently before investing, by taking into account all the subtle policies of Indian Government and other players in such deals.
My dear investors, let’s hope for the best and prepare for the worst.
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