Unlike the recent follow-on issue, the 2004 IPO issue of NTPC attracted plenty of retail interest Learning from the NTPC and REC offers The follow-on-offers by NTPC and REC will force authorities to think of a new strategy for retail investors.

There were large expectations from the recently concluded NTPC equity issue comprising 41.23 crore shares of Rs.10 each. The floor price was eventually set at Rs.201 a share. The company, among India's most successful government owned enterprises and the biggest power generating company, was making “a follow-on-public offer.” It listed its shares for the first time with an impressive debut on the Indian stock exchanges in October 2004. Then, as now, the government chose to divest a portion of its share issue to the public.

How does the recent NTPC public offer compare with its earlier one? There are similarities as well as significant differences.

Similarities

To begin with, there has been a congruence of objectives. The October 2004 issue enabled the company to list its shares for the first time on the exchanges. Besides, the government mopped up about Rs.2,700 crore by selling a 5 per cent stake. The more recent one sought to carry disinvestment by the government a step further. The sale of shares by the government does not contribute anything to the company. While continuing to retain a substantial controlling stake, the government is offloading another small portion of its equity holding in the company and boost its capital receipts.

There is also a strong similarity in the contexts in which two issues — the 2004 IPO and the recent follow-on issue — were made. In both instances, the government was trying to move on with the public sector disinvestment programme that for various reasons had slowed down. The 2004 offer was the first public offer by a government company after the UPA government took office.

The more recent one is part of a major attempt at rejuvenating the process. As spelt out by Finance Minister Pranab Mukherjee, the intention is to ask listed public sector enterprises (PSEs) such as NTPC to increase the size of their public holding. Profitable PSEs, not listed so far, have been asked to make a public issue. To counter the traditional objections to the disinvestment programme, the government has promised to earmark the sale proceeds for social sector projects. It has also ruled out privatisation — sale of a majority stake in profitable enterprises.

Interestingly, on both occasions, the government budgeted relatively small amounts under the disinvestment programme. The reasoning has been as much political as economic. Political opposition was sought to be dissipated by lowering the targets. The economic argument has been that unlike outright privatisation, a small stake sale is more expedient though it may not yield large capital receipts.

Listing by a PSE confers other major advantages as well. Very often the PSE gets to raise large capital from the market. This happens when it issues additional shares along with the government's offer for sale. Equally significant, the PSE gets a benchmark for share market valuation when it lists for the first time. The pricing of the subsequent issues ought to become more transparent when there is already a market quotation for the shares.

Between the NTPC's IPO (October 2004) and the FPO (February 2010), its valuation has gone up more than three times. Shareholders from the IPO have benefited. The government, still the largest shareholder, is seen sitting on a pile of wealth.

Dissimilarities

Comparisons with the earlier issue throw several dissimilarities as well. In 2004, the share issue was priced at Rs.62, at the higher end of a Rs.52-62 price band. Therefore, while it may not be strictly correct to compare the performance of the two issues with a time span of 55 months, certain features are clearly discernible.

Unlike the recent issue which was priced at Rs.201, the earlier issue attracted plenty of retail interest. The lacklustre investor response this time is attributed to poor market conditions and aggressive pricing of the offer. The stock market sentiment turned sour due to the news of a possible default on its sovereign debt by Greece and the likely spread effect of such a development on some of the other euro zone economies and indeed the global economy. The floor price of Rs.201 was at a discount of 5 per cent to the market price initially but the differential narrowed on the back of global cues.

Others attribute the poor retail interest to the French auction method adopted for the first time in the follow-on offer. Institutions could bid and be allotted shares at different price points above the floor price. The French auction is suitable for companies with low floating stock. While it maximises realisation by the government — allotment is made at different bid prices — the method does not ensure widespread shareholding.

LIC and SBI, picked up substantial stakes in the offer. The REC follow-on-offer, scheduled to close on February 23, is following the NTPC pattern. The floor price of Rs.203 does not offer a significant discount to the market price. Whatever discount there was quickly disappeared as market conditions turned adverse on Friday.