Mumbai: A tepid response to the follow-on public offer (FPO) of NTPC Ltd has forced the disinvestment ministry to explore ways to revise share-sale rules for state-owned firms. The Rs8,286 crore issue received a lukewarm response from both retail and institutional investors. It was subscribed just 1.2 times, and that, with the help of two large institutional investors—Life Insurance Corp. of India (LIC) and State Bank of India (SBI).
The revisions aim to ensure higher retail subscriptions, offer more flexibility in the institutional bidding process and may also involve a more attractive pricing of the forthcoming public issues of large state-owned firms.
Also See Lackadaisical Response (Graphics)
“We are in the process of analysing the issue and the present norms governing them. We will not show any knee-jerk reaction... We are analysing whether changes are required in the existing rules,” Sumit Bose, secretary, disinvestment ministry, told Mint.
The NTPC follow-on public offer, through which the government is divesting a 5% stake, received a bare 0.16 times subscription from retail investors at a floor price of Rs201. A little more than one-third of the offer was kept for retail investors.
This is the first follow-on offer under the new pricing norms that the capital market regulator, the Securities and Exchange Board of India, introduced in October. The norms allow retail investors to buy shares at the floor price while institutional bidders are required to bid at any price above the floor price.
However, restricting an institutional bidder from lowering its bid price once a price is quoted is preventing institutional investors from participating in FPOs, according to investment bankers.
In a conventional book-building process, an investor can change the bid price at any point of time.
While most foreign institutional investors and local mutual funds bid at Rs202 for NTPC, LIC and SBI placed their bids at Rs209, higher than the market price of Rs205.50 on 3 February when the issue opened. Shares of NTPC lost at least 11% between 4 January, the first trading day of the year, and 3 February.
The sale offered 204 million shares at a minimum price of Rs202 to institutional investors, but foreign investors bid only for 18 million shares.
Even though the price set for the retail investors was at a 5% discount to the prevailing market price of 1 February, the day pricing was announced, by the opening of the issue, the discount shrank to 2% as the share price dropped.
Since there were not many takers for the shares reserved for retail investors, institutional investors benefited. Their bids were at much lower prices than those of LIC and SBI.
Wiser from NTPC experience, the government is focusing on three critical issues: whether institutional investors should be allowed to revise their bids downward during the issue; fixing the floor price at around 10% discount to the prevailing market price to leave more cushion for retail investors; and, calibrating the price of an issue in line with market volatility and liquidity of the stock on offer.
“We are in discussions with the investment bankers at the moment, while the capital market regulator could be involved in discussions at the second stage,” Bose added.
“An institutional bidder is allowed to either enhance the bid or withdraw from the issue after quoting a price. There should be more flexibility and they should also be allowed to reduce their original bidding price,” said a senior official at one of the banks that managed the NTPC issue on condition of anonymity.
According to Prithvi Haldea, chairman and managing director of Delhi-based primary market tracker, Prime Database, the share sale “was not rightly priced and so it didn’t fare well. Retail investors invest only when they get shares at 10-20% discount to the market price. The government’s greed resulted in a lukewarm response and if the government repeats this, the PSU divestment programme will face trouble.”
According to www.bsepsu.com, a website of the Bombay Stock Exchange dedicated to share sales by state-owned firms, the government plans to raise Rs17,121 crore through 8.38% stake sale in NMDC Ltd, and Rs4,181 crore through 5% equity sale in Rural Electrification Corp. Ltd.
The government also plans a 10% initial share sale in Satluj Jal Vidyut Nigam Ltd.
Jagannadham Thunuguntla of SMC Capitals Ltd, a Delhi-based brokerage, said the government is reading too much into the quality of its own companies. “They feel that these are good quality companies and investors will queue up to buy them. In the absence of good retail participation and FII (foreign institutional investor) money, the whole programme is becoming a joke. LIC and SBI subscribing to the shares is like the government moving money from one pocket to another,” he added.
There are others who attributed NTPC’s failure to the unwillingness of the bankers to market share sales by state-owned firms in the absence of incentives. Under current bidding norms, the mandate to manage a share sale from a state-owned firm is awarded to investment bankers who quote the lowest commissions. As many investment bankers tend to use such share sales as an opportunity to market their own brands, they often agree to handle an issue without any commission.
The bidding norms compel associate bankers too to help the lead banker in handling the issue, even while bearing all expenses from their own pockets.
While this isn’t a new problem, it is now a crucial one because of the government’s focus on divestment. Investment bankers have started demanding incentives for handling public issues, and in a recent Mint report, Sidharth Pradhan, joint secretary, disinvestment ministry, has indicated that the ministry is in a discussion with the vigilance commission to incentivize investment bankers handling share sales of state-owned firms.
Arun Kejriwal, director of Kejriwal Research and Investment Services Ltd, a Mumbai-based investment advisory firm, said the government’s unwillingness to pay investment bankers caused the failure of the NTPC issue. Investment bankers who have mandates for the government are responsible to provide pre- and post-issue support to the shares in the market (which means they are vested with the responsibility of steadying the share price). “But the government is not giving them any money; why will they provide support?”
Graphics by Ahmed Raza Khan/Mint