Why did retail investors, and in some cases FIIs too, shun the recent follow-on public offers of leading public sector companies? How should you evaluate these issues?
Three follow-on public offers (FPOs) of leading public sector companies (NTPC, REC and NMDC) have come to the capital markets in recent months. In two cases, the government was saved the blushes of these issues remaining under-subscribed by large public sector financial institutions (LIC and SBI) stepping in and picking up substantial stakes. In all the three issues, the level of retail participation was abysmal. This is lamentable because widening the country's retail investor base is one of the avowed aims of the government's disinvestment programme.
Next year (FY11) the government aims to raise another Rs 40,000 crore through disinvestment. Clearly, if the entire disinvestment programme is not to degenerate into a mere transfer of funds from the balance sheets of public sector companies into the government's coffers, a review of what happened during the three FPOs is necessary. (We recount the individual stories of the three FPOs in the pages that follow). The government has to quickly think up ways of how these issues can be made attractive for both retail investors and foreign institutional investors (FIIs).
As anyone with even a passing acquaintance with the capital markets will tell you, the only reason investors invest in FPOs is if they get the shares of an already-listed entity at a substantial discount to its secondary market price. And as most market experts will tell you, stiff pricing was the reason why retail investors (and, in some cases, even FIIs) stayed away. The discount over secondary-market prices was too slim to get them interested.
Some evidence of a rethink within government circles has emerged. There is talk of tweaking the methodology by which prices are determined in an FPO. Earlier, a floor price was set (which was at a discount to the current market price). This was the price at which retail investors subscribed to the issue. Institutional investors had to bid at prices higher than the floor price. Under the new method, institutional investors will be asked to bid first. The minimum price at which their entire quota gets subscribed will act as the price for retail investors. Only time will tell whether retail investors will find the new method of price fixing attractive enough to invest in future PSU offerings.
However, a more fundamental issue that individual investors must address is whether they should invest in IPOs at all, given their absence of track record on the bourses and the scanty information available about them. This is one crucial issue that we have also addressed in the column that is part of our cover story package.
This article was originally published on April 20, 2010.
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