Now that the National Mineral Development Corporation (NMDC) issue has closed and been priced, it seems the better way out for the government would have been to simply enter into some kind of off-market agreement with Life Insurance Corporation (LIC) to sell the shares. Why make the pretence of having a follow-on issue? All that the government needed to do was place the shares with LIC, which could then have gradually offloaded the shares into the market. Because ultimately, LIC has ended with the biggest chunk of the NMDC stock at the cut-off price of Rs 300 and that?s what it will have to do.
If the government had any intention of making the stock more liquid, that purpose has been defeated. Before the follow-on issue, the government owned some 98.4% of the company, now it will own some 96%.
The price of the NMDC stock, which was hovering at around Rs 556 in mid-January, is now down to Rs 345. That?s a drop of close to 40% at a time when the market has managed to hold out and actually gained marginally in value and is evidence of how illiquidity can hurt a stock. Of course, the price of a stock does come off before fresh shares are issued but in the case of NMDC the fall has been sharper because it is so illiquid. Typically, LIC doesn?t sell below cost and it will need to offload its holding only in small doses because the moment the market gets a whiff that the insurer is going to sell, the bears will get into action. But that?s not the way it should have been. Once again, the government chose to price the NMDC issue expensively?where analysts came with a valuation on an Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortisation (EV/EBITDA) basis of Rs 285, after attributing a 50% premium to global peers, government chose to price the issue at Rs 300-350.
Therefore, unlike in the REC issue, where foreign institutional investors (FIIs) such as Halbis and New Vernon showed up, albeit at the last minute, and the quota for big investors was subscribed over five times, it was a virtual no show from FIIs for the NMDC issue. And that?s despite the fact that this time around it wasn?t a French auction like it was with the Rs 8,286 crore NTPC follow-on issue, where qualified institutional buyers (QIB) couldn?t withdraw a bid or lower the price at which they had placed the original bid.
While it?s true the government needs money to meet the disinvestment target, it cannot ask for valuations that are way beyond the fair value. But, clearly, the government isn?t in a mood to give up even a single penny and doesn?t want to leave too much on the table for investors. Until LIC runs out of money, it will continue to get as much as it wants but what after that? LIC had also written out a fairly big cheque for NTPC. The government has a disinvestment target of Rs 40,000 crore for 2010-11. If the markets remain in good shape the government will manage to mop up the money. So far, luck has been on the government?s side with FIIs having brought in close to $2 billion since the Budget was announced, but if the markets turn choppy for whatever reason, it might not be that easy.
Even the NTPC issue, which was more or less reasonably priced, didn?t tempt the small investors. A 5% discount to the ruling price simply wasn?t good enough in this kind of volatile environment. Indeed, the retail investor has hardly participated in the rally from 8,700 in October 2008, post the break-out of the financial crisis, to 17,000 in September 2009, which is a move of 95% in a span of less than a year, because the volatility was simply too scary.
As for NMDC, the valuation was way above what analysts believed was right. But the government doesn?t really seem to be looking for broad-based shareholding; it simply wants money and doesn?t seem to be too concerned about who?s buying the shares. As has been pointed out, privatisation in the UK under Margaret Thatcher helped to increase the equity base significantly. Since government companies are relatively safe bets in terms of corporate governance (and they also reward shareholders with reasonably good dividends), retail investors would be keen to buy PSU stocks. But only if they?re priced attractively enough. Of course, the tendency among retail investors, and some institutions, too, has been to flip the stock post listing over time, but that?s also because investors aren?t confident that the stock will appreciate because promoters price their shares so aggressively, leaving little on the table. The government seems to be doing pretty much the same.
?shobhana.subramanian@expressindia.com