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Foreign Investors flee Indian State Companies

LTN has learned that foreign investors are cutting their holdings in India’s state-controlled companies to a 3 yr low as Prime Minister Manmohan Singh’s government sacrifices shareholder return to revive the weakest economy in 9 yrs.

Overseas funds cut stakes in the 40 biggest state-owned firms to an average 7.31% at the end of June, the lowest level since March 2009, exchange data shows.

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 by 50%.

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-B Rupees (US$5.5-B) of shares in state firms according to the data.

Most portfolio managers are saying: I am only going to invest in companies that are private sector, and as far removed as possible from government policy.

A London based India-focused fund sold 1,463 shares of Coal India and 28,000 shares of iron-ore miner NMDC Ltd. (NMDC), according to a fact sheet filed at the end of May.

DS Malik, a spokesman at India’s Ministry of Finance, declined to comment on overseas funds’ holdings.

India’s BSE-PSU Index of state-owned companies has fallen 11% from this year’s high in February and trailed the benchmark BSE India Sensitive Index for 5 months through July, the longest stretch in 6 yrs. Stocks in the PSU measure trade at a median 8.2 times earnings, compared with 15 times for the Sensex, data show.

The nation’s economic growth slowed to 5.3% in Q-1 of Y 2012, the weakest pace in 10 yrs, as discord among members of the ruling Congress Party-led coalition and claims of graft damped investment.

The highest inflation rate among the 4 largest developing economies has kept India’s central bank from cutting interest rates.

The government, seeking to keep fuel costs affordable, is preventing 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-B 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 raise output after a government order in February to ensure fuel supplies to generation plants was met with a penalty. Coal India Tuesday agreed to pay as much as 40% of the value of a shortfall in contracted quantities.

India’s electricity grid collapsed twice in 2 days last week, leaving more than 640-M people without power before it was restored. Electricity shortages shave about 1.2 percentage points off the nation’s GDP, according to India’s Planning Commission.

We regard the failure of directors to raise coal prices, despite substantial increases in wage bill of 65-B Rupees inn Y 2012, to anything like market rates a total failure to fulfill their duties properly,” Oscar Veldhuijzen, a partner at The Children’s Investment Fund (TCI), wrote in a letter dated 1 August 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 30 July, Mr. Veldhuijzen said on 2 August. Mr. Rao did not answer calls.

India’s government wants to settle matters with TCI Fund amicably, former Coal Secretary Alok Perti told reporters on 29 May. The government will not interfere in commercial matters of the company, he said.

TCI held a 1% stake in the producer at the end of June, making it the 2nd-largest holder after the government, which owns 90%, according to the data.

Foreign investors held 5.55% of Coal India at the end of June, down from 6.37% a year ago, the data show. Their stake in ONGC fell to 5.29% from 5.35% in March, and to 3.15% in Steel Authority of India Ltd., the lowest since at least March 2009, from 3.47%.

The government has approved the sale of a 10.82% stake in the Steel Authority, Jairam Ramesh, India’s rural development minister, said on 19 July.

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 Eurozone,” Arti Lunia, an executive director for corporate affairs at the steel maker, said. “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,” AK Banerjee, finance director of ONGC, said on 6 August.

An index of 47 state-owned companies in the BRIC group of 4 nations; Brazil, Russia, India and China compiled by London-based consulting firm Trusted Sources has dropped 16% in the past 6 months, trailing the MSCI BRIC index by 3 percentage points.

Petroleo Brasileiro SA, Brazil’s state-controlled oil company, fell 22% during the period while OAO Gazprom, Russia’s Nat Gas export monopoly, lost 18%. Industrial & Commercial Bank of China Ltd., the China’s biggest state-run bank by market value, fell 16% in Hong Kong trading.

Total overseas holdings of domestic stocks climbed to a record 11% of India’s market value in June, according to data compiled. Net inflows this year have risen to $10.8-B, a record for the period, the data show.

On investment manager favors HDFC Bank Ltd., the 2nd 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% of those 3 companies, according to data.

There is likely no chance the Indian government will meet its asset-sale target without purchases by Life Insurance Corp. of India and other state-owned institutions because of dampened demand from overseas funds.

The government plans to raise 300-B Rupees from stake sales in the year that began on 1 April. India’s budget deficit reached 5.8% of GDP in the year ended 30 March. Emerging economies tracked by the International Monetary Fund have an estimated Y 2012 deficit of 2.1%.

India raised about 139-B Rupees from asset sales in the year ended 30 March, missing its 400-B Rupees target.

Disinvestment Secretary Mohammad Haleem Khan could not be reached for comment. India may begin stake sales next month, Press Trust of India reported on 4 August, citing Mr. Khan. The government will achieve its goal of raising 300 billion rupees, the report had Khan as saying.

It is not likely that there will be any real demand for India’s divestment assets unless there is a significant markdown in prices. Stay tuned.