In stock market, Disinvestment is generally an action of an organization or government, where it sells or liquidates an assets or subsidiary. In most contexts, disinvestment typically refers to a sale from the government, partly or fully, of a government-owned enterprise.
Disinvestment a share market trader should know
Such decision from the government provides investors with an opportunity to make profits with little research and apt timing. Research, we have already done for you (below), but timing you will have to decide.
Reasons for Disinvestment
Reason for the disinvestment could be many, but there are few reasons that generally leads to such decision: one is to provide financial support to the organization. The other reason is to improve the efficiency and effectiveness of the public enterprises through the disinvestment. Lastly, a company or a government organization will divest an asset or a subsidiary to utilize the proceeds from the sale to a better use or to welcome higher return on the investment. Also, a company may have to divest unwillingly if it needs cash to sustain the operation.
|Company Name||Issue Date||Instrument||Shares Divested||% Divested|
|BHEL LTD.PGCIL LTD.|
For the stocks that are planned for disinvestment, it has been generally seen that there remains an overhang, and some correction is seen prior to the disinvestment. Investors sell their shares before the disinvestment hoping that at the time of disinvestment they will be able to buy them back at a discount in the government offering. Also, speculators short their positions in the futures and the options market to take advantage of the price movements.
Government usually offers the shares at a discount, so by the time the disinvestment takes place the stock is already under pressure allowing the investors to square off their positions. Such was not the case a few years back, when the scarcity of free-float shares of PSUs in the market created an artificial demand resulting in artificially high prices.
Is Disinvestment an Opportunity?
Yes, Disinvestment is an opportunity, but it does not always bring bullishness in the stock and stock market. However, it does present a chance for the investors to gain from the price movements.
At the time of announcement of the news, following the trend discussed above, investors can sell their shares at the current market price, and buy those again, when the government goes for disinvestment. For e.g. Suppose the share price of XYZ co. is Rs. 100 at the time of disinvestment news, and then at the time of disinvestment the share price is down to Rs.80. So, any investor selling 1000 units at the time of the news, and buying the same units later would gain Rs. 20000 through online share trading(excluding any discount offered by the government).
Also, the government encourages the participation of retail investors in the disinvestments, and for the same it is planning to come up with discounts along with 20% quota for the investors.
Same trend was witnessed in SAIL’s March 2013 FPO. Three months before the FPO, the stock lost 29% compared to a 3% decline in the BSE Sensex for the same period. Same fate was met by the state-owned companies, Engineers India lost 21% since the announcement of the process till the follow-on public offer out in early February ’14. Similarly, Powergrid declined 14% before the completion of the FPO in October ’13. If any investor does online share trading and followed a similar strategy in the above cases, he or she would have gained atleast a percentage similar to the decline experienced by the shares till the disinvestment.
Now, we are aware of a general trend during disinvestment, so by making appropriate positions before and after the event one could pocket some significant returns.
The last government reduced its FY14 disinvestment target by more than half to Rs 16,027 crore (from Rs 40,000 crore) owing to weak market conditions. Now, the markets are more upbeat. So, there is plenty of opportunities lined up for retail investors.
Recently, the cabinet Committee approved a stake sale in ONGC (5%), NHPC Ltd (11.36%) and Coal India Ltd (10%). Following the news, shares of all the three declined sharply (as is the general trend).
Below chart is of Coal India. It could be seen that the stock suddenly fell from the price of around $382.50 to the price $340.00 after the announcement of the news.
More or less the case holds true for all the disinvestment announcements, but there are few exceptions. However, once the disinvestment is done, fate of stocks majorly depends on the fundamentals.