Public sector Life Insurance Corporation and State Bank of India have ostensibly bailed out the follow-on offer (FPO) of state-owned mining firm NMDC. The two firms have reportedly put in close to Rs 8,200 crore, or around nearly 80% of the issue amount, of Rs 9,800 crore, at the lower end of the price band. The subscriptions by the insurer and India?s biggest bank, reportedly at Rs 7,500 crore and Rs 700 crore respectively, ensured that the issue was finally subscribed 1.25 times.
Foreign institutional investors (FII), who had accounted for just 1% of the subscriptions on Thursday, didn?t bring in much more and finally ended up subscribing to just 2.5% of the issue. The response from high net worth individuals and retail investors improved considerably on Friday though they subscribed to just about a fifth of their quota. Analysts, who had estimated the fair value of NMDC at around Rs 240 per share observed that the aggressive pricing had probably kept the FIIs away.
At the close of book-building, bids were received for 41.37 crore equity shares as against the offer size of 33.22 crore equity shares. Bids for 35.42 crore share, or 85%, came in at Rs 300 while bids for 2.52 crore shares were put in at Rs 301. Given this, the government should mop up only Rs 9,800 crore, which would leave it slightly short of its disinvestment target of Rs 25,000 crore in 2009-10.
Also, the NMDC counter, which was already highly illiquid since the government owned 98.4% before the offer, will continue to remain poorly traded since the bulk of the shares offered will remain with LIC. Since investors will be apprehensive of LIC trying to offload shares, the price could be under pressure, market observers pointed out. As such the problem of illiquidity in the counter will remain for some time.
The empowered group of ministers (EGoM) had set the price band of the offer at a discount of 12.6 to 25.1% at Rs 300-350 to the then ruling market price of Rs 400.60. However, since then the stock has lost 9.46% narrowing down the initial discount to 17.28-3.5 %. The stock on Friday closed at Rs 362.70, up Rs 2.35 or 0.65%. The FPO had offered an upfront 5% discount to retail investors to the issue price, which will be discovered through book building process. In order to attract large participation from the investing community, the government this time had offered a higher discount and opted for the traditional book-building method instead of the French auction mode that was not received well by institutional investors.
This is the second instance when state-owned financial institutions had to step in a big way to bailout a public offer from government-owned entity. Last month, the Rs 8,300-crore NTPC FPO that was subscribed 1.2 times received maximum bids from LIC and SBI to the tune of Rs 4,000 crore after retail and other institutional investors shied away from the issue. Even in the case of the Rs 3,500-crore REC FPO, retail investors gave a big thumbs-down, submitting application to the extent of just 0.22 times the portion reserved for them. However, the institutional response to the offer was positive with the portion reserved for them being subscribed 5.51 times. Though the government offered a higher discount of 7.75% while fixing the floor price at Rs 203 per equity share, it got narrowed down to 4.5% towards the closure of the subscription.