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Concepts & Tutorials

Finally, The Government Shows Signs of Selling Their SUUTI Holdings

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Finally, the government will sell, or attempt to sell, the SUUTI holdings it has in various companies. We’ve written about this in Capital Mind many times – read “Why Doesn’t The Government Sell 50,000 cr. of Shares It Holds In Private Companies?

SUUTI

The SUUTI was formed to compensate investors who were promised a guaranteed return with UTI Bonds, and the shares didn’t really have the market worth for the guarantee. So the government took the shares, and paid up for the guarantee. The shares sat in a separate vehicle, the SUUTI, which has just owned them for the last ten or more years.

The government, through the SUUTI, owns a good chunk of ITC, Axis Bank and Larsen and Toubro. Why it should do so is inexplicable, especially when they are trying to divest shares in other government owned enterprises.

Finally, they will get rid of these shares. The latest RFP on the SUUTI site says:

T h e S U U T I seeks to appoint up to three qualified Merchant Bankers/Advisers and Selling Brokers for attending, assisting and advising on the SUUTI Holdings for a period of three years. The advice shall be regarding sale of the shares held by SUUTI in various companies either through the Offer For Sale (OFS), Block Deal, Bulk Deal, Regular sale through Stock Exchange or any such other mechanism subject to the Securities and Exchange Board of India (SEBI) Guidelines and o t h e r a p p l i c a b l e Rules and Regulations.

The RFP wants merchant bankers to come and help them sell these shares.

The Drip-Selling Mechanism

We have suggested a drip system for selling them. They should sell some shares every single day, and every single hour. For examples, the SUUTI owns 7.59 cr. shares of L&T, making it the third largest shareholder at 8% after LIC (16%) and the L&T employee trust (12%, long story).

If they sell 400 shares every minute of the day, they will be able to sell the entire shareholding in two years. The drip selling will initially cause some volatility, but over time, there will be equilibrium (in fact, that will be achieved within a few days, they just have to keep it going).

At the current price of L&T the shareholding is worth over Rs. 10,000 cr. and that’s a decent amount of money.

You can evolve other mechanisms, too. An open block deal window for any shares, offered at, say, 5000 shares a block at 2% above the current market price. Or other mechanisms like block sales to mutual funds, ETFs and insurers who need to buy anyhow.

This is not rocket science. While there should be capability within the government to do this, private players can suggest and implement this too. Unfortunately most of the private players are more inclined towards “deal making” and trying to justify their presence and make some 2% to 5% off the deal, so they are unlikely to suggest passive, algorithmic solutions. (But who knows, there is always hope).

The Debate

Some people have said the government shouldn’t sell. Because these are good shares. My point here is that the government has no business being in business. We are trying to get them to disinvest from the truckload of businesses they already own. So why should they own any private business like L&T or ITC? At any price, this is unacceptable (unless it’s a temporary bailout and they will offload at a later time).

Instead, the government is raising taxes? That sounds silly. Cut taxes, push consumption, and earn their revenue using these assets.

Or that the government must own them to protect against foreign raiders. Who cares really? How does it matter if ITC is foreign owned? HDFC is foreign owned. (77%) ICICI Bank is foreign owned. (52%) And why is the government trying to do such silly things like protect against foreign raiders? Why not just limit the FII limits for these kinds of companies? Owning shares is just a silly way to do this.

Finally the debate is that if they sell the prices of these shares will fall. Oh sure. But that’s temporary. The next stage will be more liquidity, more activity and finally, the fundamentals will prevail. Of course if the idea is to not let the fundamentals prevail, that’s a different story, but we can’t let that control the nation’s destiny.

We’re happy this SUUTI stake will be sold. But it needs to be done fast. The window of opportunity is closing, in our opinion, so the faster they sell, the better it is. Oh, and let’s hope they cut taxes.