The Government's exit from Maruti Udyog is significant. Pragmatism displayed in the past has helped in higher returns from the share sale.
THE GOVERNMENT's exit from Maruti has passed off without any controversy. On May 10, it sold its residual stake of 10.27 per cent in the company to a group of financial institutions, banks and mutual funds for a total consideration of Rs. 2,368 crore, which works out to Rs. 797 a share. Those institutions had bid for the shares. The purchase consideration varies among bidders. For instance, LIC, which has successfully bid for 130 lakh shares, by far the largest number, is paying Rs. 800 for a share .On the other side, Corporation Bank is shelling out Rs. 850 a share for its acquisition of 5.88 lakh shares. Two mutual funds, Reliance MF and HDFC MF, have also acquired chunks of Maruti shares.
While these institutional investors are likely to unwind their positions at an opportune moment, the question arises as to why a direct sale to retail investors was not considered. After all, a large number of them participated in Maruti's initial public offer in 2003 and made it a resounding success. Many investors have seen their initial investments appreciate considerably.
The success of the Maruti IPO had catalysed the primary market. By not going through with a public issue the Government may have denied retail investors a chance to own a blue chip at an attractive price.
In January 2006, the Government had adopted a similar strategy to sell an eight per cent stake. State owned banks, insurance and financial companies were the beneficiaries that time. The justification on both occasions, never made public, might have something to do with keeping down issue expenses to the minimum. An IPO entails a huge expenditure.
Sensitive issue
A more plausible reason is that the Government did not want to draw attention to the divestment. An IPO generates plenty of publicity. Divestment, disinvestment or by whatever other name it is called, has become politically unacceptable even if, as in the Maruti case, it is only disposing of a residual stake.
Under the UPA government, no distinction is made between privatisation (where control of a public sector enterprise is transferred to a private party) and dilution of government equity in stages. Privatisation is completely out. Even the latter, where it does not bring down the government stake substantially, has been opposed politically.
For the Government, perhaps the most embarrassing aspect is its inability to win political consensus to sell off its minority stake in companies whose control had already passed on to private parties.
Strategic sale of profitable PSEs was becoming popular under the NDA government. The buyer paid a control premium and was also given the first option to buy the remainder of shares. In the case of listed PSEs, the buyer has to make an open offer to buy a substantial number of shares from minority shareholders on the same terms.
By questioning the actions of the previous government on ideological grounds, the present government has landed itself in a legal logjam. The right of the strategic buyer to acquire the balance shares offered has been opposed.
Thus, Sterlite, which had bought a majority stake in Balco some time ago, is unable to buy the balance shares, even after it had exercised its contractual right. The matter is now before the courts. The Government also stands to lose from the delay caused by legal battles while the fortunes of the company concerned suffer because of the uncertainty.
Under these circumstances, the Government has done well in Maruti's case. P. Chidambaram said, "The Government earned a handsome return. Maruti is an example, which showed that Government could enter an industry at an appropriate time and exit at an appropriate time.''
Why Maruti is unique?
Unfortunately Maruti has been the only one of its kind. Whether one looks at from a disinvestment perspective or from a much broader angle of collaboration between two unlikely partners, Maruti is probably unique. The joint venture with Suzuki Motor Company of Japan gave India its first modern car in the mid-1980s.
The car, the 800, has consistently defined affordability in personal transportation. Maruti continues to sell large numbers of the 800 even though it has other, more recently launched small cars in its stable. Despite intense competition it has the largest market share.
It is not as though relations between the two partners were always smooth. There have been at least two well-publicised spats between the two. In 1997, it was over the choice of the company's top personnel, with Suzuki backing Jagdish Khattar over the Government's nominee, R. S. S. S. L. N. Bhaskarudu. (Mr. Khattar continues to be the Managing Director). At that time there were apprehensions that Suzuki would not transfer its gear box technology to the Indian company thus blocking the latter's drive for complete indigenisation. Both these issues were solved albeit over time.
The second time a dispute between the two was publicly aired was in September 2004. The issue then was whether Suzuki was being fair to Maruti and its shareholders by announcing substantial investments in a new company (in which Maruti would be a minor partner). Fortunately this too was resolved with Suzuki.
In both cases, the pragmatism shown by the Government helped resolve what could have become highly contentious issues.
Again, it is its farsightedness that brought superior returns for the government beginning with the spectacularly successful IPO in July 2003.
THE GOVERNMENT's exit from Maruti has passed off without any controversy. On May 10, it sold its residual stake of 10.27 per cent in the company to a group of financial institutions, banks and mutual funds for a total consideration of Rs. 2,368 crore, which works out to Rs. 797 a share. Those institutions had bid for the shares. The purchase consideration varies among bidders. For instance, LIC, which has successfully bid for 130 lakh shares, by far the largest number, is paying Rs. 800 for a share .On the other side, Corporation Bank is shelling out Rs. 850 a share for its acquisition of 5.88 lakh shares. Two mutual funds, Reliance MF and HDFC MF, have also acquired chunks of Maruti shares.
While these institutional investors are likely to unwind their positions at an opportune moment, the question arises as to why a direct sale to retail investors was not considered. After all, a large number of them participated in Maruti's initial public offer in 2003 and made it a resounding success. Many investors have seen their initial investments appreciate considerably.
The success of the Maruti IPO had catalysed the primary market. By not going through with a public issue the Government may have denied retail investors a chance to own a blue chip at an attractive price.
In January 2006, the Government had adopted a similar strategy to sell an eight per cent stake. State owned banks, insurance and financial companies were the beneficiaries that time. The justification on both occasions, never made public, might have something to do with keeping down issue expenses to the minimum. An IPO entails a huge expenditure.
Sensitive issue
A more plausible reason is that the Government did not want to draw attention to the divestment. An IPO generates plenty of publicity. Divestment, disinvestment or by whatever other name it is called, has become politically unacceptable even if, as in the Maruti case, it is only disposing of a residual stake.
Under the UPA government, no distinction is made between privatisation (where control of a public sector enterprise is transferred to a private party) and dilution of government equity in stages. Privatisation is completely out. Even the latter, where it does not bring down the government stake substantially, has been opposed politically.
For the Government, perhaps the most embarrassing aspect is its inability to win political consensus to sell off its minority stake in companies whose control had already passed on to private parties.
Strategic sale of profitable PSEs was becoming popular under the NDA government. The buyer paid a control premium and was also given the first option to buy the remainder of shares. In the case of listed PSEs, the buyer has to make an open offer to buy a substantial number of shares from minority shareholders on the same terms.
By questioning the actions of the previous government on ideological grounds, the present government has landed itself in a legal logjam. The right of the strategic buyer to acquire the balance shares offered has been opposed.
Thus, Sterlite, which had bought a majority stake in Balco some time ago, is unable to buy the balance shares, even after it had exercised its contractual right. The matter is now before the courts. The Government also stands to lose from the delay caused by legal battles while the fortunes of the company concerned suffer because of the uncertainty.
Under these circumstances, the Government has done well in Maruti's case. P. Chidambaram said, "The Government earned a handsome return. Maruti is an example, which showed that Government could enter an industry at an appropriate time and exit at an appropriate time.''
Why Maruti is unique?
Unfortunately Maruti has been the only one of its kind. Whether one looks at from a disinvestment perspective or from a much broader angle of collaboration between two unlikely partners, Maruti is probably unique. The joint venture with Suzuki Motor Company of Japan gave India its first modern car in the mid-1980s.
The car, the 800, has consistently defined affordability in personal transportation. Maruti continues to sell large numbers of the 800 even though it has other, more recently launched small cars in its stable. Despite intense competition it has the largest market share.
It is not as though relations between the two partners were always smooth. There have been at least two well-publicised spats between the two. In 1997, it was over the choice of the company's top personnel, with Suzuki backing Jagdish Khattar over the Government's nominee, R. S. S. S. L. N. Bhaskarudu. (Mr. Khattar continues to be the Managing Director). At that time there were apprehensions that Suzuki would not transfer its gear box technology to the Indian company thus blocking the latter's drive for complete indigenisation. Both these issues were solved albeit over time.
The second time a dispute between the two was publicly aired was in September 2004. The issue then was whether Suzuki was being fair to Maruti and its shareholders by announcing substantial investments in a new company (in which Maruti would be a minor partner). Fortunately this too was resolved with Suzuki.
In both cases, the pragmatism shown by the Government helped resolve what could have become highly contentious issues.
Again, it is its farsightedness that brought superior returns for the government beginning with the spectacularly successful IPO in July 2003.
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