Investors sitting on losses in govt issues

The government will have to put in extra effort to attract investors towards future offerings, going by the poor performance of a majority of divestment issues in the past two years.

Eight of 12 such issues that hit the market since the Congress-led United Progressive Alliance (UPA) government returned to power in May 2009 are trading below their issue prices. Eight of these have underperformed the Bombay Stock Exchange (BSE) Sensex since listing, data compiled by the Business Standard Research Bureau showed.

A majority of the private sector issues that have come during the same period have also not done well. Since May 2009, 95 private sector issues have come, of which 67 issues (about 70 per cent) are trading below their issue prices. In terms of performance vis-à-vis the Sensex, 68 private sector issues have underperformed the benchmark index since listing.
 

STATUS CHECK
IPO/FPO	Price on BSE in Rs

%chg* Issue
priceRetail
investor
price30-May PTC India Financial28.0026.6017.55-37.32 NHPC36.0036.0024.60-31.67 Shipping Corp140.00133.00102.80-26.57 SJVN Ltd26.0024.7021.30-18.08 NTPC201.00201.00168.15-16.34 NMDC300.00285.00266.35-11.22 Engineers India290.00275.50262.85-9.36 MOIL375.00365.00350.20-6.61 Rural Elect Corp203.00203.00208.252.59 Power Grid Corp90.0085.5098.809.78 Oil India1050.001050.001268.2220.78 Coal India245.00232.75395.2561.33 * change over issue price
Source: BSRB                                               Data compiled by BS Research Bureau

To attract retail investors, the government had offered them a five per cent discount in eight divestment issues. However, six of these eight issues are now trading below the price at which the shares were allotted to retail investors.

Investors holding allotted shares in the public issues of PTC India Financial Services, NHPC, Shipping Corporation of India, SJVN, NMDC, NTPC, Engineers India, MOIL and Rural Electrification Corporation (REC), all of which came in the past two years, are making losses. Only three divestment issues — Coal India, Oil India and Power Grid — are trading above their respective issue prices.

LIKELY EFFECTS
“The government should price its issues reasonably and leave something on the table for investors,” said Devang Mehta, vice-president and head of equity sales at Anand Rathi Financial Services. “It is necessary that issues in which the government has sold its stake in the past perform well over a medium to long term. That will instill confidence among investors for future divestment issues.”

The government plans to raise Rs 40,000 crore from selling stake in state-run companies (including Oil & Natural Gas Corporation, Steel Authority of India and Hindustan Copper) in the current financial year ending March 31, 2012. However, convincing investors to subscribe in these issues will not be easy, experts say.

“Except Coal India, the performance of almost all government issues is disappointing,” said AP Bakliwal, president, Bombay Shareholders’ Association. “It is anyway difficult to attract investors in follow-on public offerings where the price is already known. Even in the case of initial public offerings , unless investors are confident that they will be able to make money in government issues, they will not come.”

Tough market conditions will also increase the government’s difficulty in attracting investors, experts say. “In the present depressed market conditions, it will be difficult for anybody to sell IPOs, including the government,” said Mehraboon Irani, principal & head, private client group, Nirmal Bang Securities.

Coal India is the most notable example of a divestment issue rewarding shareholders in the past two years, experts say. The company’s shares have gained 61.3 per cent from their issue price of Rs 245 and closed at Rs 395.25 on Monday. This huge outperformance since listing can be gauged from the fact that the Sensex has declined 10.91 per cent during the same period.