The Bombay Stock Exchange in Mumbai. Conditions are favorable for the government's sell-off. Photo: AFP

MUMBAI – India’s plan to sell stakes in state-owned companies has received a boost as stocks trade at record highs and investment by global funds surge to the highest levels seen in seven years.

At the same time, local investors are flocking to bet on equities as alternatives when fixed-income securities and real estate offer unattractive returns.

The government set a target to raise a record 2.1 trillion rupees ($28.5 billion) from state asset sales in its annual budget in January. That fund-raising goal was set before the economic havoc to come from the pandemic and lockdowns. So far it has raised just 65.3 billion rupees ($887 million).

Now, as business and economic sentiment improves and with the expectation of a faster than forecast revival in economic activity, investors are parking more funds in equities.

The key BSE Sensex index, at 46,263, and the NSE Nifty, at 13,565, are now around historic highs.

Shares of better-managed companies such as Infosys Technologies, HCL Technologies and Asian Paints have already surged, causing investors to punt on second and third-grade companies.

Investment bankers see a confluence of favorable market conditions and the government’s need for additional funds as it spends more on programs designed to soften the blow of the pandemic. More cash is also needed for defense because of China’s incursions into the northern Ladakh area.

Investors are also betting on more initial public offerings (IPO). Burger King India, a subsidiary of the US fast food chain, traded on Monday on the first day at 138.40 rupees, compared with its sale price of 60 rupees. The price rose further on Tuesday to 166.05 rupees on the BSE.

The Ladakh standoff has created new demands on India’s budget. Credit: Handout.

Investors have gained from most of the IPOs launched this year, including listings by Happiest Minds Technologies, Route Mobile, Rossari Biotech, Chemcorn Speciality Chemicals and Gland Pharma.

The BSE PSU Index, too, has risen to 5,951, from 4,388.3 on October 15, reflecting investor interest in state-run companies, also known as public sector undertakings.

So is it a good time for the government to press ahead with its sales?

“Absolutely. Investors are going in for cyclical stocks because they are seen to reflect an economic recovery,’’ said Subhrajit Roy, executive director and head of equity capital markets at Kotak Mahindra Capital Company. 

“Stocks of state-run companies are seen as pro-cyclical and several of them are seen to be inexpensive.’’

Air India has been put on the market, with Tata showing interest. Image: AFP

Still, several such companies including banks are trading much below their 52-week highs because of indifferent performance. State-run banks are saddled with high levels of bad loans and may need government help to recapitalize.

Should the government delay sales of some of these companies to get a better price?

“It’s difficult to get the best price either as a seller or a buyer,’’ said Roy. “They’ll do well to leverage the current situation and begin making some sales.’’

Still, the government will do well to initiate measures to improve their financial performance and efficiency if it is to eventually fetch their due worth, say investment bankers.

Typically, it is mainly large and institutional investors who bid in the government stake sale done through a stock exchanges window.

The government on Monday approved the sale of its 63.75% holding in Shipping Corp of India (SCI), setting in motion the process of the share sale. SCI, the country’s largest shipping company, owns tankers, bulk carriers, containers, offshore vessels, coastal and passenger services, dry docking and a shipbuilding consultancy. SCI closed today at 85.90 rupees, near its year high of 89.95.

Besides the sale of smaller stakes, the government is also involved in selling controlling stakes in companies such as the national carrier Air India and Bharat Petroleum Corp Ltd (BPCL), a leading oil marketing company.

On Monday, one of India’s biggest business houses, Tata, expressed interest in bidding for Air India, along with other bidders. A high-powered government committee has also begun vetting bids for the sale of 52.98% in BPCL.

In the year ended March 2020, the government was able to raise 503 billion rupees selling stakes in state-run companies, about half its target of about one trillion rupees. The government later lowered its target to 650 billion rupees but couldn’t meet it.

A woman talks on a mobile phone in front of a logo of the Bombay Stock Exchange (BSE) in Mumbai, India on 23 May 2019. Photo: Himanshu Bhatt/NurPhoto via AFP

Reports suggest the government may also push ahead with sales of stakes in Life Insurance Corp of India, New India Assurance Co and GIC Re – all in the insurance business – to bridge the shortfall.

Since April, the government has sold 14.8% of Hindustan Aeronautics, raising 49.24 billion rupees ($668 million) and 12.82% of Bharat Dynamics for 7.71 billion rupees. Additionally, it has sold shares in Mazagaon Dock Shipbuilders for 4.43 billion rupees, RITES for 1.73 billion and SUUTI for 2.21 billion.

Hitting the 2.1 trillion rupees target by the end of March may be a tall order, but the timing seems to be right for the government to cash in on the for now favorable market conditions.