Divest to large investors

There is no necessary contradiction between the government divesting its holdings in public enterprises through auction to a limited number of large investors and its desire to widen the base of ownership of these enterprises. In any capital-raising exercise through sale of existing shares in a company or fresh issue, the primary objective must be to ensure that the issuer gets the best price. This objective is defeated if a large portion of a public offer is reserved for small investors. They have little influence on the pricing of shares in a public issue, but issuers are forced to keep the issue price at a substantial discount to the expected price on listing, so as to generate so-called listing gains. To ensure that pricing of issues is market-determined and issuers get the best deal, it would make eminent sense for issuers of capital to sell shares to large institutions through a French auction. This allots as many shares as are bid for by the highest remaining bidder till all the shares on offer are exhausted. Retail participation could be through mutual funds or brokerages that agglomerate retail applications and also take on the task of allotting shares to the applicants. Retail investors can always buy shares in the secondary market after the listing.

The government claims the emphasis of the disinvestment programme is to widen people’s ownership of the public sector enterprises. The trouble is, less than 5% of the population invests in equities as an asset class, most people would rather keep their money with banks or invested in relatively-less-risky assets such as real estate. Offering a 5-10 % discount to the issue price is not the best way to increase the equity culture among the citizens . Equity needs to be considered as a viable asset class by a wider spectrum of people. Easier norms for opening demat accounts, more large brokerages — floated, perhaps by public sector banks — with credible, transparent ways of working, sound corporate governance practices , all would help. Selling public sector shares cheap when the potential investor base remains tiny only serves to enrich an elite at the cost of the exchequer.