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.

fiscal pressure, not being aware that the high market price was a function of market manipulation of a few.

The optimum share price based on the inherent value of the company’s worth was R155/share. However, the company was traded at more than R300 before disinvestment and around R266 at the time of disinvestment. Such high market price gave an impression that the company was sold at a very low price. It has started falling very severely after the sale, and would go soon below the discounted purchase price. LIC and public sector banks would then incur losses, and the purpose behind transferring public sector risks to the market/people will also be destroyed, the price having not been discovered through a transparent process in the market, and the price discovery based on the bids from public sector institutions brings in unnecessary government intervention. The taxpayer would then pay again if the company’s performance does not improve.

In the current situation, it makes no difference whether the shares are owned by the government directly or by public sector institutions. The price of R155 also looks a very high price. As the following analysis would show—public sector institutions have been forced to quote a high price in their offering, close to the government price.

One of the ways to look at the efficiency of sale is to see its price-earnings ratio. If the market price was the correct index, this ratio would have been around 80. It has been sold now at a ratio of around 45, very high according to any standard, and if nothing miraculous happens in the company, the public sector financial institutions will incur a huge loss, contrary to the current public impression that the government has sold at very low prices due to fiscal distress. And the last word, it is a bad idea to transfer government risks to public sector financial institutions. It may be recalled that even blue chip companies of the government were sold in earlier disinvestments in the 1990s at ratios of 5 to 7.

However, it is welcome that the process has started, and the government has not succumbed to price manipulation in the market by cancelling the deal midway, and that the government has got a high price. Hopefully, now, in the interest of buyers, the government would exert pressure on the PSU to improve its performance in order to ensure that the public sector institutions

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