Uncertainty over PSU share sales heightens

The cold response to the Hindustan Copper share sale by foreign institutional investors, despite pricing the issue at a discount to its market price, has put the government in a fix.

The finance ministry is worried that it might not be able to meet its fund raising target from the stake sale of NTPC and NMDC, next in the queue.

The government wants to raise Rs 13,000 crore (Rs 130 billion) by selling 9.5 per cent stake in NTPC and around Rs 7,000 crore (Rs 70 billion) by offloading 10 per cent in NMDC.

Estimates show if it has to raise the targeted sum, NTPC shares would have to be sold at not below Rs 170 a share, with Rs 179 a share for NMDC. Currently, shares of NTPC and NMDC are ruling at a discount of 6.35 per cent and eight per cent, respectively, to these estimated prices for the issue.

Given the disconnect between the government's and the market's expectations about issue pricing, bankers and analysts said uncertainty had heightened about the outcome of these proposed share sales.

"In an offer for sale, the discount to the prevailing market price is the most important factor for the success of an issue. If the discount is not right, then buyers will not come," said Jagannadham Thunuguntla, head of research, SMC Global Securities.

"The government is not likely to come out with huge discounts. They might end up banking on LIC (Life Insurance Corporation, a government-owned entity) to bail them out if the issue is not getting a good response."

The recent Hindustan Copper issue, priced at a 41 per cent discount to the market price, was subscribed by state-owned insurance firms and banks. But, this was an exception, given the thin floating stocks - 0.4 per cent - of the company in a market that had pushed up its share price.

Analysts said there was no scope for any discount in the NTPC and NMDC share auction. Investment bankers said if not priced appropriately, the government would again have to depend on state-run

banks and insurance companies for share auctions in December or postpone the issues.

"There is enough appetite in the market for issues but only if the price is right," said Prime Database's chairman and managing director, Prithvi Haldea.

He feels the government should make PSU auctions specific to retail investors, as these are strong companies and offering discount in these would also fulfill a larger cause.

Deven Choksey, managing director of K R Choksey, said, "This discount policy is only encouraging bear market operators and causing huge price destruction for players who are already invested in these companies."

The share price of Hindustan Copper fell 40 per cent in two trading sessions and was locked in a lower circuit on the exchanges since the government said it would sell its stake at a discount in the company.

So, too, with the Oil and Natural Gas Corporation (ONGC) share price in February this year. Short-sellers were aggressively playing the counter, as it was widely believed the government would offer shares at a discount in March.

Instead, the government chose to price its auction at a premium and could not attract investors. The issue was bailed out by LIC, which put in around Rs 12,000 crore (Rs 120 billion) as subscription money, at the last minute.

Market experts say, in such a scenario any strong initial public offer (IPO) being launched prior to December 10 would see a huge investor response, as most fund managers of foreign and offshore funds are on a Christmas holiday after that.

The IPO of Bharti Infratel, tower arm of telecom major Bharti Airtel, has plans to raise around Rs 5,000 crore (Rs 50 billion). The issue's launch is likely by the first week of December but the company has been waiting for a green signal from the Securities and Exchange Board of India.