Can't bear all this

The government decided to offload the shares of six public sector companies. Three issues got off to a good start, while IBP got a lukewarm response in the initial bidding.

With two more issues about to open, including the biggest of them all (ONGC), the government panicked. The disinvestment minister hit every button he could, discovered a bear conspiracy in the market and held out sundry threats.

One day later, IBP too got a good response and the minister promptly claimed that his threats had worked! May be IBP would have sold well anyway and it was simply a matter of timing. So was it much ado about nothing?

Not quite. What should cause worry is that the government continues to be uneasy with free and open markets, and responds with a lack of maturity to unwelcome trends.

In the old days, UTI or some other financial institution would simply be ordered to buy. Now the methods are different, but the game is the same.

If the government feels so bullish, how can a group of brokers/investors dare to feel or act bearish? Even assuming that there was a bear cartel hammering down public sector share prices, so what?

It is perfectly legal, indeed logical, for shareholders to sell their holdings of IBP or CMC stock in the market and try to pick up the same companies’ stock at a lower price in the public issue. In recent times, this happened with ICICI Bank’s issue too.

There are a several research papers from the National Bureau of Economic Research in the US which confirm that most IPOs tend to be under-priced, and that 10-15 per cent first day gains on listing are not uncommon even in the US market.

In the case of shares that are already listed, like those of the PSUs whose shares have caught all the attention, the only way to ensure a first-day gain is to hammer down the share price in the hope of lowering the floor price of the public float.

And it has worked. Gail’s share price was Rs 224.75 ten days ago, and was hammered down to Rs 196 — the floor price has been set at a much lower Rs 185.

CMC’s price was Rs 540 ten days ago, climbed to Rs 570 and then came back to Rs 540 — the floor price has been set at Rs 475.

The disinvestment minister would have had a legitimate grouse if the bear cartel was shorting the market (that’s illegal), or if there was synchronised selling, or if merchant bankers were busy selling while being advisers to the issue.

None of this has been established, and to argue that broking companies should not take sell orders merely because they are linked to the merchant bankers is to misunderstand the role of various players in the market.

In any case, if blame is to be handed out, the ministry must get its due share for the primary folly of bunching six big issues in such a short span of time, clearly with an eye to meeting the year’s disinvestment target.

The demand-supply balance for public sector stock changed, and so naturally did their prices. But this normal market activity has been sought to be criminalised. One thought we had moved beyond this stage.