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Foreign investors are cutting their holdings in India’s state-controlled companies to a three-year low as Prime Minister Manmohan Singh’s government sacrifices shareholder return to revive the weakest economy in nine years.
Overseas funds pared stakes in the 40 biggest state-owned firms to an average 7.31 percent at the end of June, the lowest level since March 2009, exchange data compiled by Bloomberg show. The Children’s Investment Fund Management, a London-based hedge fund, is suing the Indian government and Coal India Ltd. (COAL), alleging state directives have hurt its investment in the miner. Oil & Natural Gas Corp. (ONGC), India’s largest explorer, in May said discounts offered to state refiners on crude-oil supplies cut its annual profit in half.
The intervention is eroding investor confidence in Singh’s administration that has been beset by policy reversals, corruption scandals and record power cuts, according to Prudential International Investments Advisers. Waning offshore demand may undermine the government’s plan to bridge a budget deficit by selling 300 billion rupees ($5.5 billion) of shares in state firms, said F&C Asset Management Plc.
“We are reducing exposure to state-run companies,” Jeff Chowdhry, the London-based head of emerging-market equities at F&C, which oversees about $150 billion, said by phone. “Most portfolio investors are saying: I am only going to invest in companies that are private sector, and as far removed as possible from government policy.”
F&C’s India-focused fund sold 1,463 shares of Coal India and 28,000 shares of iron-ore miner NMDC Ltd. (NMDC), according to a factsheet filed at the end of May.
D.S. Malik, a spokesman at India’s Ministry of Finance, declined to comment on overseas funds’ holdings.
India’s BSE-PSU Index (BSETPSU) of state-owned companies has dropped 10 percent from this year’s high in February and trailed the benchmark BSE India Sensitive Index (SENSEX) for five months through July, the longest stretch in six years. Stocks in the PSU measure trade at a median 8.2 times earnings, compared with 15 times for the Sensex, data compiled by Bloomberg show.
The nation’s economic growth slowed to 5.3 percent in the March quarter, the weakest pace in almost a decade, as discord among members of the ruling Congress Party-led coalition and claims of graft damped investment. The fastest inflation rate among the four biggest developing economies has kept India’s central bank from cutting interest rates.
The government, seeking to keep fuel costs affordable, has prevented state refiners from raising prices. Oil & Natural Gas is required to supply crude to refiners at subsidized prices to partly compensate them for selling diesel, kerosene and cooking gas below cost. The government sets ONGC’s subsidy share at the end of each quarter, according to the explorer.
ONGC in May said its annual profit of 251.2 billion rupees would have almost doubled without the subsidy.
Coal India agreed to increase wages in January and kept prices unchanged as policy makers urged it to protect power utilities from higher raw-material costs. The company plans to lift output after a government order in February to ensure fuel supplies to generation plants or pay a penalty. Coal India yesterday agreed to pay as much as 40 percent of the value of a shortfall in contracted quantities.
India’s electricity grid collapsed twice in two days last week, leaving more than 640 million people without power before it was restored. Electricity shortages shave about 1.2 percentage points off the nation’s annual growth, according to the Planning Commission.
“We regard the failure of directors to raise coal prices, despite substantial increases in wage bill of 65 billion rupees this year, to anything like market rates a total failure to fulfill their duties properly,” Oscar Veldhuijzen, a partner at The Children’s Investment Fund, wrote in a letter dated Aug. 1 to Coal India Chairman S. Narsing Rao, a copy of which was made available by the fund to the media. TCI filed the lawsuit in Delhi High Court on July 30, Veldhuijzen said by phone on Aug. 2. Rao didn’t answer three calls made to his mobile phone.
India’s government wants to settle matters with TCI Fund amicably, then Coal Secretary Alok Perti told reporters on May 29. The government won’t interfere in commercial matters of the company, he said. TCI held a 1 percent stake in the producer at the end of June, making it the second-largest holder after the government, which owns 90 percent, according to Bloomberg data.
Foreign investors held 5.55 percent of Coal India at the end of June, down from 6.37 percent a year ago, the data show. Their stake in ONGC fell to 5.29 percent from 5.35 percent in March, and to 3.15 percent in Steel Authority of India Ltd., the lowest since at least March 2009, from 3.47 percent.
The government has approved the sale of a 10.82 percent stake in the Steel Authority, Jairam Ramesh, India’s rural development minister, said on July 19.
The reduction in offshore holdings in Steel Authority is “in sync with the general withdrawal of FIIs from emerging economies due to unprecedented meltdown in the euro zone,” Arti Lunia, an executive director for corporate affairs at the steelmaker, said by e-mail. “Holdings by any group keep on changing based on market sentiments.”
The drop in foreign ownership is because of “heightened volatility” in the world economy and a “clear-cut and consistent policy of subsidy-sharing will create confidence among shareholders,” A.K. Banerjee, finance director of ONGC, said by phone on Aug. 6.
An index of 47 state-owned companies in the so-called BRIC group of four nations -- Brazil, Russia, India and China -- compiled by Bloomberg and London-based consulting firm Trusted Sources has dropped 17 percent in the past six months, trailing the MSCI BRIC index by 2 percentage points.
Petroleo Brasileiro SA (PETR3), Brazil’s state-controlled oil company, slid 20 percent during the period while OAO Gazprom, Russia’s gas export monopoly, lost 18 percent. Industrial & Commercial Bank of China Ltd., the nation’s biggest state-run bank by market value, slumped 18 percent in Hong Kong trading.
“We’ve never been big fans of owning state-run companies in emerging markets due to a prominent risk of ’socialization’ of shareholder profits,” Masha Gordon, London-based head of emerging-market equities at Pacific Investment Management Co., which oversees about $1.8 trillion worldwide, said by e-mail.
Total overseas holdings of domestic stocks climbed to a record 11 percent of India’s market value in June, according to data compiled by Bloomberg. Net inflows this year have risen to $10.8 billion, a record for the period, the data show.
F&C’s Chowdhry favors HDFC Bank Ltd. (HDFCB), the second-largest Indian private lender, and Tata Consultancy Services Ltd., the biggest software exporter. He also owns shares of ITC Ltd., the top cigarette maker. Foreigners own at least 14.6 percent of the three companies, according to data compiled by Bloomberg.
Chowdhry said there’s “zero” chance the government will meet its asset-sale target without purchases by Life Insurance Corp. of India and other state-owned institutions amid subdued demand from overseas funds.
The government plans to raise 300 billion rupees from stake sales in the year that began April 1, Thomas Mathew, a joint secretary for capital markets in the finance ministry, said June 18. India’s budget deficit reached 5.8 percent of GDP in the year ended March. Emerging economies tracked by the International Monetary Fund have an estimated 2012 deficit of 2.1 percent.
India raised about 139 billion rupees from asset sales in the year ended March, missing its 400 billion rupees target.
The government may sell stake in one state-owned company next month, disinvestment secretary Mohammad Haleem Khan said in New Delhi today. Achieving the goal of raising 300 billion rupees shouldn’t be a problem, he said.
“It is unlikely that there would be significant demand for divestment assets by the Indian government unless there is a significant markdown in prices,” John Praveen, chief investment strategist at Prudential International, a unit of Prudential Financial Inc., which managed $943 billion in assets as of March 31, said in an e-mail.
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