RINL IPO Delay:  The Question on Government's Decision Ability

The govt has again differed the disinvestment process of state run RINL (Rashtriya Ispat Nigam Limited). The government has not given any reasons for postponing the IPO, but said it will proceed with its plans to sell shares in other companies. The govt has targeted Rs 30,000 crore through divestment programme. But it hasn’t sold any shares since April, when the fiscal year began. RINL IPO of 48,89,84,620 equity shares was the first public issue from the government in FY13. The government’s plan was to sell Rashtriya Ispat’s shares between Oct. 15 and Oct. 18 and list them on Nov. 1.

Senior government officials said Tuesday a panel of ministers had put off its meeting to finalize the price band for the IPO. They said this was probably due to a disagreement between bankers and the government on the pricing. The government doesn’t want to sell the shares below the company’s book value of 22.52 rupees a share. However, bankers have recommended that a lower price be set to ensure demand, the officials said.

If the cabinet could not agree and united in this importance decision share sale of RINL then how can one believe it will go ahead with reforms so called reforms agenda. It has given wrong signal about implementation of reform policies. The disinvestment is essential to fulfil its fiscal consolidation agenda. After the RINL delay, now even the diehard optimists would find it hard to believe that a government, which struggles to make its steel minister Beni Prasad Verma see economic reason, could make the BJP (Bharatiya Janata Party) or the BSP (Bahujan Samaj Party) to buy its argument on far more contentious issues, especially such as FDI in multi-brand retail.

What is the steel ministry's problem with going ahead with the RINL IPO? The Steel minister, Mr Beni Prasad Verma is not willing to sell the stock below its book value of Rs. 22.52 a share, while investment bankers say the stock won’t fetch more than Rs. 15 a share. Verma and his officials argue that RINL is a `navratna’ company and should therefore  fetch at least Rs. 21 a share. RINL may be a `navratna’ for the government and the steel ministry, but there are many companies far better than it globally are trading just at valuations below their book value. Arcelor Mittal, the world’s biggest steel-maker, is trading at a price to book ratio of 0.42. South Korea’s Posco is at a price-to-book of 0.72. The government’s own SAIL is valued at a price to book value of 0.88, while Tata Steel is at 0.93. Why any investor pay valuations higher than what some of the best companies in the market are available for investment?

The RINL episode is a stark reminder of the fact that this government is being pulled in different directions and that the leadership is still unable to put its foot down on what it believes is in the good of the nation. Prime minister and his team have managed to spread some positive talk in the market and change the narrative somewhat. But if the rest of the government remains the way it has been since 2004, trouble will get enlarge and it could first come in the form of a sovereign rating downgrade.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com