Mumbai: State-owned insurer and India’s largest institutional investor Life Insurance Corporation of India (LIC) came to the rescue of the follow-on public offer (FPO) of NMDC Ltd. Foreign institutional investors (FIIs), mutual funds, banks and retail investors mostly stayed away from the government’s largest divestment issue this year, which closed on Friday.

Graphic: Ahmed Raza Khan / Mint

Almost two-thirds of the issue was subscribed by LIC, which has been bailing out the government’s recent divestments. Overall, the issue was 1.25 times subscribed.

“We have not seen as many FIIs in NMDC as in the REC (Rural Electrification Corp. Ltd) issue," Sumit Bose, secretary, divestment ministry, told Mint.

While at least 50 institutional investors participated in the issue, LIC alone placed bids for shares worth Rs8,000 crore.

Market intermediaries are not excited by the idea of LIC coming to the rescue of the divestment of a public sector unit.

“Ultimately government is moving money from one pocket to another," said V.R. Srinivasan, director at Brics Securities Ltd. “They cannot allow it to fail as it may be a loss of face."

He blamed poor marketing and the high price for the lukewarm investor response. “They could have priced it cheap like Maruti (Suzuki India Ltd) and won over investors’ confidence," Srinivasan added.

An investment banker involved in the divestment process said the NMDC offer should have been cheaper. “The NMDC issue would have attracted many retail investors if it were priced below Rs260 a share. In the coming days, the government has to price the issues cheaper to attract retail investors," he said.

According to him, after the listing of the new shares, retail shareholders will dump them, dragging the share price down. NMDC shares rose marginally by 0.65% to close at Rs362.70 apiece on the Bombay Stock Exchange on Friday.

The price band for the issue was Rs300-350 and LIC bid at the lower end. The cut-off price and allotment of shares will be decided on Sunday at a meeting of the empowered group of ministers.

Retail investors will be offered shares at a 5% discount to the cut-off price. As against 115.6 million shares reserved for retail investors, bids were received for just 25.25 million, recording a bare 0.22 times subscription.

Against nearly 165.2 million shares reserved for qualified institutional buyers, including domestic institutions and FIIs, bids were received for 377.5 million shares—a 2.28 times subscription. Most of the bids came at the lower end of the price band. At least 412.5 million shares received bids at Rs300, while around 58.36 million bids came in at Rs301, according to data posted by the stock exchanges.

NMDC is the third public sector company to sell shares under the government’s divestment programme since January. While the first two public issues of NTPC Ltd and REC followed the newly introduced French auction route to raise around Rs12,000 crore, the government opted for the traditional book-building route for NMDC. The issue offered nearly 332.2 million shares to pare the government stake from 98.38% to 90%.

The book-building process, typically used during initial public offerings (IPOs), is one of the most commonly used methods of price discovery. In this, investors are allowed to bid in a price band with a 20% variation and the final price is determined only after the closure of the bidding. Bids are collected during the issue period at various prices within the band. The final issue price is determined based on the price that receives maximum investor support.

Apart from LIC, some of the mutual funds and public sector banks, including State Bank of India, Punjab National Bank and Canara Bank, participated in the issue. FIIs, including Wellington Financial Lp, Mathews Asia Funds, and Norges Bank, bid for small quantities of shares, said a person familiar with the development.

Assuming that the NMDC issue is priced at the lower end of the band, the government will miss its Rs25,958 crore target for divestment in the current fiscal by about Rs2,000 crore.

The government plans to raise Rs40,000 crore in next fiscal and this is expected to partially help it reduce the fiscal deficit from 6.9% this year to 5.5% next year.

Retail investors haven’t been drawn to the divestments thus far. In the NTPC issue, the retail subscription was merely 0.16 times and in the REC issue it was 0.3 times.

With the NMDC issue, the ongoing divestment programme for the current fiscal year has been completed. Satluj Jal Vidyut Nigam Ltd is expected to hit the market with its IPO in April, kicking off the government’s disinvestment programme for the next year during which it plans to raise nearly Rs1,200 crore. Investment bankers and brokers said the government must price the forthcoming issues cheaper if it wants to attract investors. Otherwise, LIC will have to repeat its rescue act.