Column : Destroying shareholders’ wealth

Nov 27 2012, 01:17 IST
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SummarySelling Hindustan Copper shares at a 42% discount wasn’t a bargain as the share price was artificially high.

The recent sale of Hindustan Copper shares at a huge discount to the market price to LIC, public sector funds and banks raises a large number of questions that need to be analysed.

The current disinvestment policy of the government states that citizens have every right to own part of PSU shares; PSUs are the wealth of the nation and the wealth should be kept in the hands of the people, but the government has to retain majority shareholding, i.e. at least 51%, and management control. It further states that the government will divest 10% stake in unlisted profit-making PSUs in the market. The purpose is clear: the public should own at least 10% in all companies. This float also allows the company’s performance to be judged by millions of shareholders, through pricing of shares, rather than the performance being only judged by a few bureaucrats and technocrats in the government, and ministers, in an incestuous environment. The market scrutiny through a transparent market process keeps the public sector managers on their toes, unlike being judged only by a few in the governments, who can be influenced.

The auction of Hindustan Copper shares at 42% discount to market price gives the impression that the shares have been sold at unrealistically low prices and the existing shareholders have lost huge value due to the government action, else their value would have continued at the earlier high levels. But is that really the case?

The problem with Hindustan Copper Limited was that about 99% of its shares were owned by the government and a minuscule number of shares were traded by very few. This led to the possibility that the share prices could be manipulated by a very limited number of shareholders to very high levels by mutual sales, to enable these shareholders get a very high price at the time of open offer; of course, if the discovered price was a function of the market price. To stop this, it is always advised in contemporary literature that such companies should first be delisted, and then shares sold. Sale of shares at the time of disinvestment can then be based on intrinsic value of the company, which is based on performance, and discovered with the help of advisors and valuers. This was done in this case, but the high manipulated market prices before sale led to an impression that the government undersold the shares under

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