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Inexplicably, The Government Isn’t Selling ITC Shares It Owns, But Insiders Continue Their Selling


Surjit Bhalla has an interesting take on why the government isn’t selling ITC shares it owns through the SUUTI stake (HT @baddutt):

A suggested explanation for the Indian government (read that as politicians and IAS bureaucrats, plus others) not selling Ashoka or ITC is that they gain enormously from “kickbacks” in the form of discounted or free rooms, or discounted or free dinners, or discounted or free marriage parties. For those not knowing, more than 54% of ITC revenue is not from tobacco.

This is a great conspiracy theory but it’s a little difficult to believe because:

a) the bureaucracy can extract those favours anyway, since ITC depends on the government in too many way, being a tobacco giant, an FMCG and Agri company.

b) the revenue ITC makes from hotels is 1100 cr. out of a total revenue of Rs. 33,000 cr. Of profits, it’s even more tiny – the Hotels business makes 140 cr. out of 12,660 cr. profit before tax. It’s the slowest growing of all the ITC businesses, and profits (before tax) wise, hotels are smaller than paperboards (892 cr.) and Agri (835 cr.). Source: ITC FY 2013-14 presentation.

Basically for a business that is tiny for ITC, it wouldn’t really make sense to offer such large discounts as to be valuable. And remember the government stake in ITC is worth more than 30,000 cr. To give you a context, the total sales from all other PSUs the government wants to divest in, in FY 2015, adds up to 58,000 cr. – they could get more than half of that from just selling ITC shares. (And there’s others in there, like L&T and Axis Bank, which will add at least 20,000 cr. more)

As a historical note, the government owns this stake because UTI, a government owned company, had these shares as part of a mutual fund called US-64, which had guaranteed returns. On redemption, the share values didn’t meet the guarantee, so the government bought all the shares and made good on the guarantee. They own the shares as a Special Undertaking of the UTI or SUUTI.

Read: Why doesn’t the government sell Rs. 50,000 cr. of stake in private companies?

Sandip Sabharwal thinks something’s in the offing, and that there have been a large number of insider sales transactions recently, which he things means “management feels its overvalued”. The number is large (Rs. 166 cr. of insider sales in FY15) but it’s not abnormal, as there were Rs. 307 cr. such sales in FY14. Here are the top insider sales:


(Gleaned from transaction details provided to BSE, deduplicated and assumed close price of the day of transaction to arrive at amounts)

As we can see, only a few insiders seem to have sold disproportionately higher than last year. However such sales (which are usually after ESOP grants) could go larger by the end of the year.



Note: We’ve building the Capital Mind Data platform for our Premium users which will allow you to query this information. We’ll post an update when we have it ready! 

This doesn’t really indicate abnormal sales patterns, though insiders do tend to sell a large part of their holdings. K N Grant, for instance, has sold over 10 lakh (1 million) shares, but his residual ownership is just 5.26 lakh (526K) shares. Y C Deveshwar, the CEO, sold over 800,000 shares and owns about 12 lakh (1.2 million) shares now. He sold nearly all of the 400,000 shares he got as ESOPs in November, and then some.

(But it’s interesting to see that Y C Deveshwar sold over 119 cr. worth shares in FY 14! )

Our View

ITC shares shouldn’t be held by the government. It’s a private company!

It’s illogical that a new government with a majority chooses austerity (read: Less expenditure, even if it hurts) instead of selling stuff it shouldn’t be owning, despite the fact that the market is at all time highs and there will be NO problem selling those shares. And then, it’s choosing to sell stakes of PSU’s instead, such as in SAIL where it made a paltry 1700 cr.

There is no explanation for why the government isn’t FIRST selling these shares before getting all sorts of cabinet approvals to sell other shares. A simple negotiation process can easily bring that money in, and most institutions – domestic and international – will be interested in what is one of the highest market-cap stocks in India.


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