Power Grid shares fall 3.58% ahead of Follow-on offer

Offer price 11.7 per cent less than the stock’s Friday close

The shares of Power Grid fell over three per cent today, a day before its follow-on public offer (FPO) opens, as the issue’s offer price was less than the stock’s Friday’s close.

The empowered group of ministers fixed the price band at Rs 85-90. At the upper end, this meant a discount of 11.76 per cent to the stock’s closing price of Rs 102 on Friday. Retail investors and employees of the company will get a five per cent discount to the issue price.

Power Grid shares fell 3.58 per cent to Rs 98.35 on the Bombay Stock Exchange. This usually happens in an FPO, as arbitrageurs try to benefit by selling shares in the secondary market at a higher price and purchasing in the public offer at a lower price.

Justifying the discount, Disinvestment Secretary Sumit Bose said, “This is a follow-on offering and a 10 per cent dilution is also happening. It has always been the endeavour of the government to price (its issues) reasonably.”

Power Grid’s FPO of 841.77 million shares, which will open on Tuesday, comprises fresh issue of 420.88 million shares and an offer for sale of 420.88 shares by the Indian government. After the issue, the government’s stake will come down to 69.4 per cent from 86.4 per cent.

The issue will close on November 11 for institutional investors and on November 12 for retail and non-institutional investors.

“The pricing is as per our expectations. Long-term investors can apply,” said Deven Choksey, managing director at KR Choksey Shares and Securities.

However, experts say investors will have to temper expectations from the issue. “It can’t deliver returns like Coal India,” said VK Sharma, head of private broking at HDFC Securities. “Retail investors can apply if they are expecting up to five per cent gains.”

Power Grid is planning to spend about Rs 1,19,840 crore ($27 billion) in 2012-17, double its current five-year plan’s capital expenditure. “The company plans to spend Rs 13,000 crore in FY11 and Rs 16,700 crore in FY12 for capex,” said SK Chaturvedi, chairman and managing director, Power Grid. In the last three financial years, it has invested about Rs 26,000 crore.

At the upper price band of Rs 90, the FPO aims to raise about Rs 7,500 crore.