The Union government’s plan to go in for a major disinvestment drive involving a number of important public sector companies is good for its finances, the capital market and investors.
It will also strengthen good management practices and improve accountability in these companies. According to reports, the government is drawing up a plan to increase public shareholding in all listed public sector companies to minimum 25 per cent in the next three years.
This is in accordance with a recent SEBI directive which has prescribed such a shareholding pattern in order to ensure uniformity among all listed companies, irrespective of their promoters.
The norm is already in force for private companies. There are 60 listed state-owned companies now and in 36 of them, the minimum public holding is less than 25 per cent. The government’s stake in some companies is as high as 90 per cent.
The government will be able to raise at least Rs 60,000 crore from the sale of shares of these companies at current market prices. Some initial public offers (IPOs) are also being planned.
It will make a big difference to the country’s fiscal situation. Another major benefit is that the injection of a large number of shares will give greater depth to the share market. The recent rally in the stock market saw much money chasing many good shares.
Their valuations reached very high levels in a short period of time. This may not be good for them and the market. A large number of poor quality shares also gained.
This poses a great risk to investors, especially retail investors. Many public sector companies are blue chip companies and greater availability of their shares will strengthen the market.
The market is susceptible to high volatility now because of low liquidity. The top 100 companies actually account for 75 per cent of the market volume. The listing of new companies or more shares of listed companies will increase supply and make the market more stable.
The government can sell the shares at good prices now because the market mood is good. But unloading the shares in a short period may not be good for the companies and the market. However, the government has the option of selling the shares over the next three years so that the sale can be staggered to get the best prices.
Retail investors will also gain and the investor interest in the market will be sustained.