CKG Nair & Jinesh Panchali
New India has been waiting for a major act of mobilising capital in tune with the growth ambitions of an emerging economic powerhouse—a public issue that would emphatically announce the arrival of capital markets as the main source of funds for investment. Many thought the LIC would go for a mega issue in 2022. But it did/could not, though it came out with the largest IPO in nominal terms.
A quick look at the real value, in terms the average INR-USD exchange rates in the respective years, to facilitate inter-country and inter-temporal comparison of IPOs, shows that the Coal India public issue of Rs 15,200 crore ($3.3 billion) in 2010 has been the largest IPO in India. This is followed by the 2022 LIC IPO of Rs 21,000 crore ($2.69 billion), Reliance Power IPO of Rs 11,700 crore in 2008 ($2.68 billion), Paytm IPO of Rs 18,300 crore in 2021 ($2.47 billion), ONGC IPO of Rs 10,534 crore in 2004 ($2.34 billion), etc, in the last 20 years. Compare these numbers with the big global public issues: Aramco’s $25.6 billion in 2019, Alibaba’s $21.8 billion in 2014 and Softbank’s $21.3 billion in 2018. Clearly, big Indian companies, with all their vast, demonstrated capabilities are not as bold when it comes to public issue for mobilising capital. PSUs dominate the relatively large issues, an indicator of the strength of the Indian public sector enterprises.
What about the Indian Railways (IR) getting corporatised and going for a mega public issue of Rs 1.65 trillion ($20 billion), with a little twist in the philosophy behind a normal public issue? Placing the average citizen at the centre of this IPO, it should be priced at par, with allotment only to retail individuals, including railway employees. Cut-throat valuation-based premium pricing, milking the cow without leaving anything for the calf, has been the bane of IPOs in India.
Every Indian has a strong attachment, an umbilical cord connection, to the IR. It has been providing public services at minimum cost for over a century. Funded mainly through budgetary allocations, IR is looked upon as an asset of the people and the Republic. Its expansion and modernisation demands are enormous needing large-scale funds (BE FY24 is Rs 2.4 trillion). Large listed rail companies in the US, Canada, China and Japan have huge market capitalisation. Union Pacific Corporation, CSX Corporation (both US), the Canadian Pacific Railway, and Canadian National Railway, have market capitalisations of $118 billion, $59 billion, $96 billion and $76 billion, respectively, are examples. IR is bigger than them in track length and other assets, employment, traffic numbers and volumes.
Therefore, IR is an ideal candidate for an innovative entry into the capital market with a mega IPO at par, allotment to only retail investors and railway employees, with caps on the number of shares allotted. The idea is to share a slice of this family silver with as many citizens as possible and mobilise substantial funds for modernisation and expansion of the IR. It will also facilitate entry of a large number of investors into the securities market—an under-achieved objective, as only about 3% of the population still invest in the securities markets.
Our assessment and assumptions are as follows. The number of total bank accounts is 110 crore; 47 crore are under the Pradhan Mantri Jan Dhan Yojana (PMJDY). Using these broad numbers and adjusting for inactive, small, multiple, corporate and other-than-savings accounts, etc, unique individual accounts may be around 50 crore. Everyone holding Jan Dhan accounts may not have the ability to invest in the securities market. Hence, securities markets could reach about 30 crore of individual bank account holders through an IR retail public issue. However, many of them do not have demat—currently about 11 crore, and ‘active’ a much lower number—and trading accounts. A longer issue window and a special drive in opening demat and trading accounts with active support of the brokerages and the large office/staff network of IR will enable all interested to apply for this IPO.
Coming to the capital and potential issue size, etc, of the IR, our broad estimates are the following. (We make it clear that no standard valuation of the IR has been attempted. However, the indicators are sufficient to unveil the theme of this article). Capital of the IR, including upto RE FY23 is Rs 6.6 trillion. This is by taking only budgetary provisions over the years into the account and not including any internal resource mobilisation and, as such, it is a conservative estimate. Assuming divestment of 25% of the equity at par, the issue size comes to Rs 1.65 trillion, which, at the current exchange rate (average `82) will be $20 billion. A 25% dilution also would be in full compliance of the minimum public holding rules without having to seek any exemptions or relaxations. Moreover, since the issue is only 25% of equity, control of the IR, even after listing with normal secondary market trading, will remain with the government which will continue to hold 75% of the equity.
Assuming equity is issued at face value of Rs 10, then the number of shares available at 25% dilution will be 16,500 crore. Further assuming allotment in the range of 500 to 2,000 shares per applicant, 8.25 crore to 33 crore investors can be allotted shares, with the exact number depending on the size of applications. These numbers can be iterated suitably by the IR management to maximise the outcome for the policy objective.
IR is on a massive expansion and modernisation drive. Apart from generating the much-needed funds, an IPO with a social call can simultaneously help achieve many objectives. Substantial increase in the investor population, thereby deepening, widening and invigorating the securities market, will have a long run salutary effect on the entire economy. Like the railroad-led development of many economies in the last century, let us have an IR-led development of our capital markets too. Like a magic bullet [train].
(The authors, CKG Nair & Jinesh Panchali, Respectively, are director and professor of the National Institute of Securities Markets. Views are personal)