The dismal response to NTPC?s follow-on public offer, valued at Rs 8,286 crore, puts a big question mark on the government?s future disinvestment programme and its plans to broad-base the equity market through larger retail participation. Given the solid track record of the company?it has 22 plants and produces 29% of the country?s total power?it was taken as a given that the issue would be lapped up by investors. But, in the end, the offer was oversubscribed only 1.2 times and that too after Life Insurance Corporation and State Bank of India bailed it out on the last day. The retail portion was grossly undersubscribed at 0.16 times and the high net worth individuals? portion was only 0.43 times. Though some might blame the timing of the issue?the benchmark Sensex was on a tailspin on global cues?good stocks are seldom vulnerable to market fluctuations as was seen during the Maruti offer in 2003. The NTPC debacle raises three pertinent issues for the government to consider before it goes for FPOs of companies like SAIL, MMTC and Hindustan Copper. The first is pricing: the government had left very little on the table for investors by way of discount on the issue price. The initial discount of 5% further narrowed down to 1.5% as the share price of the company fell during the two weeks before the FPO. Retail response will only be better if the issues are attractively priced with a larger discount and doing this will be a win-win situation for both the government and the investor in the long run.
The government also needs to take a fresh look at the French auction route where investors place sealed bids for quantity and price and a final decision is reached in consultation with the market regulator. Since this process was used for the first time, investors could neither comprehend nor execute it properly. The conventional book-building route is a tried and tested process where an investor can put in an application even on the last day and can change the bid price at any point in time. The third lesson is to build enough confidence with investment bankers who help to rope in premium foreign investors as was the case in Reliance Power in 2008, which saw the IPO getting subscribed by a record 70 times, despite no projects on stream. As the government will have to go to the markets repeatedly in the near future to meet its disinvestment target, it must stop blaming external factors and get its act together so that other issues do not meet the same fate as NTPC.
