With a big chunk of the Hindustan Copper Limited (HCL) issue—estimated at around 30-40%—having been picked up by Life Insurance Corporation (LIC), the disinvestment has once again been rescued by the PSU insurance major. Perhaps that’s something the government anticipated the need for when it decided to hike individual company limits for LIC to 30% despite the insurance regulator opposing this—under IRDA rules, insurance companies cannot hold more than 10% of the equity of individual companies. Though the finance minister has said he was happy the issue had been oversubscribed—the minimum float was 3.7 crore shares as compared to the bid for 5.2 crore shares—the government has got just R808 crore of the R1,375 crore it would have got had the issue been fully subscribed at the floor price of R155. The fact that FIIs, the biggest players in the stock market, have largely stayed away from the issue is an indication of how little interest there was in it. And not surprisingly since, thanks to its small free float (0.41%), the share price has little connect with the company’s fundamentals. Despite the company’s copper cathode production falling and equipment and other production problems, the company’s 12-month trailing PE is a whopping 61—at the 42% discount, this is still 44 times.
The good thing, of course, is that the government has finally accepted issues need to be properly discounted if they are to be sold. At least two planned disinvestments were put on hold with the merchant banker-advised price below, in some cases, even the book value. Senior ministers have opposed selling shares of PSUs under their charge at such prices, arguing speciously that it could invite the ire of the CVC or even the CAG. This lesson is important since, if issues are not hugely discounted, LIC may end up bailing out all future issues. While LIC wrote out a cheque of R4,000 crore when NTPC was being disinvested in February 2010, in March it bought 40 crore of 43 crore of ONGC’s shares being offered for disinvestment—while it bought the shares at R304, ONGC’s stock has stayed below that level since then. Though LIC buying more shares of public sector enterprises being disinvested will help the crisis-struck budget, insurance-holders of LIC’s policies may have a thing or two to say about this—even if you don’t look at issues like ONGC where LIC is out of money, over the last decade, the NSE’s PSU index has tripled while the overall Nifty grew 7 times. That is, LIC’s policy-holders are paying a price for the support LIC is giving in insuring the disinvestment process.