Completing a Rp93.96bn ($1.42bn) deal on a day when India’s BSE Sensex Index dropped 5.9%, the NSE CNX Nifty Index fell 6%, and markets across the board — in Asia and globally — collapsed is no mean feat. And the Indian government managed just that with its sale of a stake in IOC, when no other issuer dared to hit the market and when investors were refusing to touch transactions with a barge pole.
But behind India’s triumph is a different tale. One where it pushed LIC, a state-backed insurance firm, to purchase a big portion of the deal. Of the 242.92m IOC shares sold, more than 80% was bought by LIC, and those were bought at the last minute.
| In this case the government completely misjudged conditions and investor sentiment |
LIC is certainly not a a stranger to sell-downs by state-owned enterprises. It has actively involved itself in divestments, often taking up chunks of stock — sometimes at the behest of the government and sometimes not.
But the IOC purchase is understood to be LIC’s single largest involvement so far in a transaction. And it doesn’t bode well for India’s divestment programme.
For starters, it isn't a true public offering of shares if such a huge portion of the stock is bought by other state-owned enterprises (SOE). Foreign institutional investors stayed well clear of IOC, and the shares not bought by LIC were actually taken up by other domestic SOEs. This means money is not being put into the system but is instead just rotating among a handful of government-backed units.
It isn't as if institutional investors are shying away from Indian stocks. Coal India’s Rp226.13bn divestment on January 30 saw red hot success, with institutions from Asia and the US putting in big orders, in what was a blockbuster trade for the country. LIC too participated, but it was on its own accord rather than being roped in by the authorities.
There are so many things India could have done differently to replicate Coal India’s success. More flexibility, for one, would have gone a long way. Sure, the bookbuilding period for IOC had been scheduled and investor feedback over the weekend before the deal hit the market was positive. These are important, but the government should have paid heed to the turbulent stock markets before pressing go.
By allowing itself more time to monitor market movements, and by halting its deal if the timing was off, the government might have scored a different outcome. Issuers - including the sovereign - need to be flexible if they want to win over the market, but in this case the government completely misjudged conditions and investor sentiment.
India has undoubtedly got away some big sell-downs so far this year. And there is perhaps an argument to be made that by forcing LIC to buy into IOC, the government managed to save face among market participants. But India needs to start responding more to market forces if it wants to look good over the long term.