The follow-on public offer (FPO) of National Mineral Development Corporation (NMDC), which opens on March 10, will indeed be a litmus test for the government after the poor response to the FPOs of National Thermal Power Corporation and Rural Electrification Corporation. The government?s decision to take the conventional book-building route for the NMDC FPO, instead of the French auction route taken in the last two FPOs, is a step in the right direction and will help in better price discovery that can potentially attract larger retail participation. In the French auction route, institutional investors bid above a base price while retail investors bid at the floor price. As a result, institutional investors with the highest bids are given priority over retail investors. The conventional book-building route is a tried and tested process where an investor can put in application even on the last day and can change the bid price at any point of time. Since the country?s largest mining company has low floating stocks?the government owns 98.38% of the company and will divest 8.38% stake through the issue of nearly 330 million shares?the key challenge now will be to set the floor price with a higher discount than its current stock price. Analysts say that since the price-earnings multiple of the company is exorbitantly high at 48 times, a steep discount will be needed to attract both domestic and foreign investors. Past experience with government-owned companies like Dredging Corporation, IBP and IPCL shows that retail participation in FPOs was encouraging where the government offered 15-25% discount on the market price to retail investors, boosting their participation. The Empowered Group of Ministers will have to take the final call on the floor price and undertake a delicate balancing act so that it can mobilise the targeted Rs 13,000 crore from the markets and meet the total disinvestment target of Rs 25,000 crore for the current fiscal.

The government?s decision to announce the company?s public issue price a day before the offer opens is a smart move as it will not give speculators any room to pull the stock price down as was perhaps the case with REC. Moreover, the government must increase the number of bidding centres and hold regular meetings with bankers to ensure maximum participation of premium investors. A case in point is the Reliance Power IPO in 2008, which saw the offering getting subscribed by a record 70 times despite no projects on stream. Since NMDC will be the last public company to be divested in the current fiscal, it is important that the government adopts the right lessons from past failures and makes the offering a success. That will help boost confidence in PSU stocks for future divestments.