Indian government renews privatization drive

Government offloads second Maruti stake since June 2003.

The Indian government raised Rs15.67 billion ($355 million) yesterday (January 12) from the sale of an 8% stake in passenger car manufacturer Maruti Udyog. Kotak Mahindra Capital Corporation and SBI Capital Markets advised the government on the sale, which will bring the government's residual stake down to 10.24%.

To ensure transparency the 23.11 million share sale was structured as a controlled auction with the floor price set at an approximately 10% discount to Maruti's traded price on the day the auction was launched - Rs620. The scrip closed at Rs654.

Only public sector banks/financial institutions (including insurance companies) were invited to bid for the shares and even AMCs and Mfs managed by the banks/FIs were not eligible to bid. Interest was high given the opportunity to acquire a substantial stake in one shot and seven financial institutions and all 27 eligible banks submitted expressions of interest.

Minimum bid value was pegged at Rs100 million. A further condition stipulated that the present holding of the institution in Maruti and shares transferred from government the new sale tranche should not exceed 10% of Maruti's equity on a combined basis. The shares come with a six-month lock up during which they cannot be transferred.

Finance minister P. Chidambaram announced the names of the successful bidders, bid price and the number of shares they received. India's largest life insurance company, the Life Insurance Corporation (LIC), picked up more than half the shares on offer, acquiring 16.8 million shares at Rs682 per share.

In all, eight bidders acquired Maruti shares including the State Bank of India, which is getting 3.9 million shares at Rs660 per share. The highest bid was for Rs725 per share and the lowest for Rs660 per share, with the average price translating to Rs678.24. This represents a small premium to today's close and a healthy 7% premium to the reserve price. Maruti's 3,609 employees are being offered 20 shares each at the average price.

Maruti came into existence in the early eighties as a 50:50 joint venture between the Government of India and Suzuki Motor Corp, Japan. Its economy model, the Maruti 800 was and continues to be the first passenger car owned by many Indians.

In 2002, then disinvestment minister Arun Shourie allowed Suzuki to gain majority control in Maruti through a multi pronged approach including the Japanese major paying a control premium of Rs100 billion. From this year onwards the government's right to appoint a nominee director on the board of Maruti ended and this is said to have prompted the sale.

Emboldened by the transaction, and perhaps spurred by the thought of ending the financial year with a tighter fiscal deficit, the government is now saying it is considering liquidating its remaining 10.24% stake and potentially executing other divestments too.