Central government disinvestment is likely to kick-start as the Indian government is under pressure to improve its fiscal deficit, a host of consultants and a state-owned company official told mergermarket. ”Market-driven divestments will also give impetus to the capital markets through IPO and rights offerings, which are likely to see government support by way of underwriting commitment,” the company official and one foreign banker said.
Pending issuances include those by state owned enterprises like National Hydroelectric Power Corporation (NHPC) and OIL India, a Mumbai-based lawyer said.
State-owned engineering conglomerate, HMT and NHPC could be divestment candidates, said a private equity source. An earlier report filed in September 2008 by this newswire said that HMT could consider a strategic stake sale.
A decisive victory to the Congress Party-led coalition in the general elections saw the Indian market upbeat on Monday. Trading activity on Indian bourses came to a halt as major stock indices shot to a 15% circuit limit within minutes of market opening. It was suspended for the rest of the day as it hit the 20% mark. A survey of consultants, bankers and lawyers indicated anticipation of economic reforms by the new government. This includes the divestment of stakes in some state-owned companies held up due to resistance from communists and socialist parties backing the outgoing government.
Strategic stake sales in state-owned companies are not likely to take effect quickly, said a Mumbai-based banker. The banker pointed out that listed companies like Hindustan Petroleum and Bharat Petroleum could go to the market. “There are quite a few oil marketing companies in the fold,” he added.
However, a Delhi-based lawyer felt that it would not be easy for the government to sell stakes in oil marketing companies given that oil prices have been volatile over the past few years. The government may choose to strengthen the finances of some of these companies before going to the market, he added.
A report by French securities firm CLSA identified that the Government of India’s holding in listed state-owned companies alone is worth USD 176bn. A reduction in shareholding to hypothetically 51% across all the state-owned entities could bring in USD 62bn at current market prices, the report stated. ”We believe the government will, however, test the waters with small stake sales. A 10% stake sale in the ten large public state undertakings (PSU) that are likely disinvestment candidates can bring in USD 17bn,” the firm estimated in its report over the weekend.
CLSA’s list of likely disinvestment targets include listed companies like National Thermal Power Corporation, National Mineral Development Corporation, BHEL, SAIL, Power Grid, GAIL, as well as unlisted companies like Coal India, Balco and Oil India.
Telecom companies like BSNL and MTNL could see some stake sale from the government, said a Delhi-based banker. BSNL is the largest state-owned telco and entirely owned by the government. The company had put off IPO plans in October 2008 due to poor market conditions, according to earlier press reports. The banker felt that the appetite may just be present now in this sector.
The Delhi-based lawyer felt that the government may auction 3G spectrums to private telcos and raise quick resources prior to looking at divesting stakes in BSNL and MTNL. The lawyer felt that the government will then look at divesting stakes when the state-owned companies get enough traction in terms of revenue and profitability in the 3G space.
There could also be some minority divestments in companies like Bharat Electronics and Bharat Heavy Electricals by way of strategic tie ups, a Mumbai-based lawyer said, identifying Larsen & Tourbo as a likely partner.
M&A to kick off with greater fund inflows and consolidation
A lot of domestic M&A activity will pick up, said Shailesh Haribhakti, managing director & CEO at Haribhakti Associates, a consultancy firm. He identified M&A play in textiles, gems & jewellery, auto components and entertainment. It would be more aggregation rather than a predatory approach encouraged by private equity investors and bankers looking to contain non performing assets, Haribhakti added.
There is a lot of interest from foreign players entering the market, said the sector banker, identifying interest in real estate and infrastructure.
Two other bankers and a lawyer added that India would also see greater foreign direct investment inflow in the insurance, retail, and capital goods sectors. The only way India would be able to beat countries like China would be through increase in FDI inflows, the lawyer said.
Banking reforms: Cap for individual foreign investors unlikely to be increased
There is a lot of expectation of reforms to accelerate in the banking sector with government shareholding in state-owned banks expected to fall from the current minimum of 51% to 30%. Further, the Indian government had initially spoken of permitting foreign investment in banks beyond the current 5% individual limit.
However, considering the global pressures faced by most leading financial institutions overseas, which are currently economically supported by their respective governments, it is unlikely there would be much FDI coming into the Indian banking sector, said a ratings analyst looking at banks in India.
The ratings analyst was skeptical as to how depositors would react should the government bring down its stake in state-owned banks like Bank of Baroda to 30%. ”In December 2008 we saw a flight of capital from private sector banks to state-owned banks. Hence, decreasing government holding to 30% first needs higher depositor insurance to instill confidence among depositors,” he explained.
At the same time, delays in the opening up of the banking sector could negatively impact private-owned banks like Development Credit Bank, said the analyst. DCB said that it was open to a stake sale to a foreign bank, as earlier reported by this newswire.
Insurance reforms: Do global majors have funds to acquire higher stakes?
The passage of the Insurance Amendment Bill currently in Parliament, will enhance the foreign direct investment limits in insurance companies to 49%. This will open up a new source of capital for the fast growing insurance sector, said Paresh Parasnis, principal officer and executive director, HDFC Standard Life.
Two bankers estimated that state-owned insurance companies like Life Insurance Corporation of India (LIC), and New India Assurance Company could see the government bringing down its shareholding from the current 100%. ”The question is - who would be in a position to take up the stake sale? - and hence it is likely that LIC’s divestment would be by way of the capital market,” said a second banker.
While the market and many insurance companies are upbeat that foreign shareholdings will rise from the current 26% cap, bankers are skeptical over actual deal flows given that some of the global insurance majors such as New York-listed AIG and Fortis are currently facing economic pressures in their home markets.
Aviation reforms: Global airline majors indicate preference for franchise
While strategic stake sales in the aviation sector are expected to change the fortunes for companies like Kingfisher Airlines, Jet Airways and SpiceJet, one banker said that even if this were to be permitted, global airline companies are facing their own domestic pressures, and hence there would only be a handful of companies open to the idea of a potential stake acquisition in the domestic airline industry. Further, they would want to ensure control looking at the way many Indian airline companies are operating, he added.
Aviation reforms may not be top priority for the new UPA government, said a second banker. Even though the same government has come into power following the election results, it was not the wish of the entire earlier government to open up the sector, he said, adding that it was Praful Patel, the aviation minister, who had pushed for the reforms. ”Even if the newly elected Congress government does open up the skies, global airline companies have indicated preference for the franchise model and are not exactly falling over each other to pick up stakes,” the banker said.
A Jet Airways source said that currently it would not wish to pass any comments as the situation is hypothetical. The company had, in an earlier report filed by this newswire, said that it is not currently interested in a strategic stake sale given present valuations.
