Why PSU stocks soared in a sluggish market today

Even before ONGC’s auction was set to close, the government- hard-pressed for funds - approved the proposal for expediting disinvestment in other public sector companies through the buyback route, under which cash-rich public sector undertakings (PSUs) will buy back the government’s stake.

This is, of course, not really disinvestment. It is a form of poor corporate governance where the major shareholder does what he likes with the company’s money for his own ends.

[caption id=“attachment_230700” align=“alignleft” width=“380” caption=“It is a form of poor corporate governance where the major shareholder does what he likes with the company’s money for his own ends.Reuters”]  [/caption]

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Imagine the hue and cry that everyone, including the government, would have raised if a private sector company had used the company’s funds to buy out shares largely held by the promoter. Sebi is very clear in its buyback norms that promoters cannot participate in such buybacks. But the government is above board and such minor rules do not apply to it. In fact, the centre had asked Sebi to workout a route through which this buyback can take place.

While individual PSU boards will have to approve the buyback, given the government’s hold on the company, it is very unlikely that any of the boards will go against the diktat.

The cash seen in the books of these PSUs has been accumulated over the years and was supposed to be utilised for growth or given out as dividend equally to shareholders. This buyback move, however, gives access ‘only’ to the promoter to take away the cash.

If these PSUs were unlisted, there would have been no problem if the government took out money, but being listed this move shows the scant respect the centre has towards minority shareholders. So much for corporate governance that the government advocates for corporate India.

If this is the case, why is the market rewarding PSUs by raising their prices?

Though the mechanics of the buyback are still not clear, most analysts are expecting that the shares bought from the government will be extinguished (reduced from the equity capital). This will result in higher earnings per share and the profit will need to be distributed to fewer shareholders. It is this fact that has resulted in buying in PSU shares rather than the enthusiasm over government meeting its disinvestment target.

Share price of MMTC closed 1 percent higher at Rs 856, NMDC closed 2 percent higher at Rs 183.50, Shipping Corporation closed 1 percent higher at Rs 70.75, STC closed 5 percent higher at Rs 273.65, Engineers India closed 2.17 percent higher at Rs 277.25.