Mumbai: Encouraged by recent changes in bidding norms by the finance ministry’s disinvestment department, at least 50 institutional investors, both domestic and foreign, rushed to buy shares offered at the follow-on public offering, or FPO, of Rural Electrification Corp. Ltd (REC) on the last day.

The REC issue closed on Tuesday with an overall subscription of 3.1 times. It attracted 336 bids from qualified institutional buyers, or QIBs, with Halbis Capital Management (Singapore), a part of the HSBC Group, emerging the largest institutional bidder, applying for shares worth Rs1,000 crore, according to investment bankers hawking the issue.

The retail portion of the issue, however, continued to see a poor response with 30% subscription.

H.D. Khunteta, director finance, REC, said: “ The NTPC story—where local institutions had to support the FPO—has been reversed."

“Though LIC (Life Insurance Corp. of India) had put in a bid for Rs3,000 crore, it is unlikely to get any shares in the issue as many institutions, largely FIIs (foreign institutional investors), have bid higher," he added.

This is because while LIC had bid at Rs205, the maximum bids for around 160 million shares out of the total issue size of 1,717 million shares have come at Rs206.

After the issue, the government’s stake in REC will come down to 66.8%.

Of the Rs3,500 crore being raised, 75% would go to the company and the rest to the government.

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In the wake of the failure of the NTPC issue in January, the government had to tweak the so-called French auction norms and allow institutional bidders to revise their bids both ways (up and down) in the REC issue. In the NTPC issue, institutional investors could only raise their bids and were not allowed to revise them downwards.

This was a significant move; many market critics believe that the NTPC issue failed to attract institutional investors because they couldn’t do this. In their absence, the government had to step in and the issue was solely driven by two state-owned institutional investors, State Bank of India and LIC.

The capital market regulator introduced the new bidding process for FPOs in October 2009.

The so-called French auction 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.

The fate of the REC issue was uncertain till the end of the day, however, and LIC was seen bidding aggressively for the issue, maybe because the government was not sure about the interest of foreign institutional investors, or FIIs, till the very end. Till Monday, the issue was subscribed 0.59 times.

On Tuesday, LIC placed bids for shares worth Rs3,000 crore at a price of Rs205 a share, but its bid failed with many FIIs, domestic institutions, mutual funds and banks bidding for the shares at higher prices.

Some key institutional investors include FIIs such as Halbis, Sansar Capital Management Llc, GMO Llc, Prudential Portfolio Managers Ltd, Nomura Holdings Inc., and an international investment arm of the Fidelity Group.

The QIB portion of REC’s issue was subscribed 5.5 times, with bids above Rs206 a share accounting for 2.25 times the shares on offer.

Sansaar Capital quoted the highest bid at Rs215 a share, according to one investment banker.

The portion reserved for high net-worth individuals, or HNIs, and domestic firms, too, was subscribed 1.75 times at Rs203, with Securities Trading Corp. of India Ltd being one of the major subscribers.

With bids worth Rs400 crore, ICICI Prudential Life Insurance Co. Ltd was the top bidder among all domestic institutional investors. SBI Life Insurance Co. Ltd, DSP BlackRock Investment Managers Ltd, Reliance Capital Asset Management Co. Ltd and SBI Funds Management Co. Ltd also bid for shares.

Atul Mehra, co-CEO, JM Financial Consultants Pvt. Ltd, one of the book running lead managers of the issue, said: “The French auction worked this time, thanks to the changes by the department of divestment. Investors appreciated the fact that 75% of the issue was fresh shares and only 25% was divestment by government. The pricing was also more attractive and the market was stable."

The entire NTPC issue was divestment by the government. The discount offered to retail investors for the NTPC issue was 5% against 8% offered in the REC issue.

However, on 19 February, when the NTPC issue opened, the discount shrank to nearly 5%. REC shares continued to fall and on Tuesday the discount further shrank to 4.5% to the closing price at Rs212.7.

Of the nearly 85 million shares reserved for QIBs in the REC issue, nearly 40% bids came from FIIs and DIIs (domestic institutional investors) each, while bids from mutual funds accounted for 13%. Nearly 7% bids under the QIB category were received from domestic banks, including ICICI Bank Ltd, State Bank of India, and Union Bank of India.

Out of at least 35%, or 60 million, shares of the REC issue that were reserved for retail investors at a floor price of Rs203, only around 20 million or 30% of shares received bids. The retail subscription in the case of the NTPC issue was 16%.

According to brokerages, the discount on REC shares was not enough to attract retail investors. “There is a feeling that the issue price is on the higher side. Given that the share was available at around Rs50 around a year ago, the pricing seemed a bit unrealistic and inflated for a public sector undertaking. This has kept many retail investors away," said P.S. Balasubramanian, vice-president, Muthoot Securities Ltd.

At the height of market volatility following the collapse of Lehman Brothers Holdings Inc., shares of REC dropped to Rs53 each in November 2008. Since then, they have risen 300% while the Sensex has gained 79%.

The next FPO could be that of NMDC Ltd. According to, a website of the Bombay Stock Exchange dedicated to share sales by state-owned firms, the government plans to raise Rs17,121 crore through a 8.38% stake sale in NMDC.

The government also plans an initial share sale of 10% of the equity in Satluj Jal Vidyut Nigam Ltd.

Graphics by Yogesh Kumar/Mint