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Prithvi Haldea: Cold response to hot cakes

The NTPC issue was badly structured and inappropriately priced - it was planned without looking at the needs of investors

Prithvi Haldea 

What an opportunity missed; what a bad beginning of the Grand Divestment Programme! It hurts that the government got such a poor response for one of its best enterprises, National Thermal Power Corporation (NTPC). An issue that should have sold like hot cakes has come a cropper; and even the one-time subscription, most of it, has been stage-managed with domestic government institutions, such as LIC and SBI, subscribing to almost all of the qualified institutional buyer (QIB) portion. The retail portion has been grossly undersubscribed at 0.16 times and the high networth individuals (HNI) portion at only 0.43 times.

The outcome is thus exactly the opposite of the professed statement of the government that “every Indian has a right to own shares in PSUs” (as per the election manifesto). This was the perfect opportunity and the retail investors were conveniently forgotten.

What should add to the misery and embarrassment is Reliance Power, a company in the same sector, with no projects on stream, no earnings and yet a larger issue size (Rs10,123 crore) at double the price (Rs 450) was able to get its IPO subscribed 70 times in 2008. More importantly, it managed to draw as many as 4.6 million retail investors, who subscribed their portion 14 times by putting in Rs 39,919 crore of hard cash in a period of just four days. NTPC could merely manage less than Rs 472 crore from the retail segment with just about 100,000 investors. Even the recent small IPO of an IT company, Infinite Computers, attracted 122,000 retail applications! Sure, the market conditions were different, but it would be too simplistic to blame a bad market for the poor response!

The blame game has already started with voices in the government blaming the poor market conditions for the debacle. Such good stocks, however, should not be vulnerable to market conditions in any case. This was made clear, for example, by the Maruti offer in 2003. Moreover, the government has now seen several periods of highs and lows and high volatility to have anticipated these, and planned accordingly. Where was Plan B in case the markets went down?

The poor retail response is also being attributed to the fact that the retail investors do not have the depth/appetite. This is again just hogwash, going by the past experience.

Blame is also being put on some bear operators, who hammered the stock down, before and during the issue. Unless manipulation is proved, which does not seem to have happened, one should not blame the sellers. Surely, the market cannot only have buyers. This risk, inherent in every follow-on public offer (FPO), in any case, should have been anticipated — it was a déjà vu of 2004.

There is no point in blaming either the investment bankers or the FIIs. This is not a case of government diktat where executive orders can be issued for everyone to invest. People would put in money only if they see a good profit opportunity. That’s true for retail, that’s true for institutions.

The truth is that the NTPC issue was badly structured and inappropriately priced. It did not cater to the investors; it was only planned with a seller’s attitude.

The government acted like a private promoter with the intention of maximising the price. Private promoters can be greedy, the government should not be. The government’s greed, it seems, even made it believe that the institutional investors would give it a much higher price than the market/floor price.

This led to using the French auction system for the follow-on public offering (FPO). I have been arguing for the introduction of this system, for initial public offerings (IPOs), where the promoters, and not the market, have been deciding the offer price, and hence there has been no true price discovery. Moreover, an investor is prohibited from bidding above the price band. This system was introduced for an FPO instead (where there is already a price discovery every second in the secondary market). For FPOs, this method would work only for highly illiquid stocks where the free float is limited; where the institutional investors are not able to either get the quantities they want; where the market price would get highly impacted with a large order, and they feel the stock is undervalued for them to bid for a much higher price. None of this was true for NTPC.

This is the reason why there was no “real” QIB interest. FIIs, which typically dominate this segment, bought less than 10 per cent of the issue, putting in even lesser money than the retail investors. Regrettably, the applications of government institutions sent wrong signals to the market — that true price discovery had not taken place. Worse, these institutions put in bids in the very first hour, which does not happen any more as there are no incentives to do this, and then vitiated the price discovery by bidding at Rs 209 against the floor price of Rs 201 and a market price of Rs 205, thus preventing other institutional investors to bid lower than Rs 209.

More significantly, the government got the pricing for retail very wrong. As far as the retail is concerned, an FPO can work only with a good discount, and in a rising market where the price differential grows by the day. Why would a retail investor subscribe to an FPO if the differential is negligible; which he knows can evaporate just in one trading session; and worse, when he has to block his money for nearly three weeks (the mechanism of Application Supported by Blocked amount or Asba is yet to take off)

While in an IPO, the retail investors take cues from the institutional investors and blindly put in money when the QIB portion is heavily oversubscribed, what works for FPOs is only the differential. So even hypothetically, even if NTPC’s QIB portion would have got heavily oversubscribed, the retail money would still not have come in. QIBs would have put monies to get large allotments; however since retail investors are looking at only 50 to 100 shares, they would have no reason to buy at a price higher than the market price and they could as well as buy from the market.

In any case, FPOs are used only when the objective is to get new retail shareholders and the issuer is willing to give a significant discount to make that happen; otherwise, companies would go for a rights issue or a QIP. FPOs are the most difficult form as these are based on the hope that the differential between the offer price and the market price would stay or increase during the issue period. In fact, FPOs create an ironical situation where the company’s own offer price is competing with its market price on a minute-to-minute basis. While some private promoters can manipulate their market price, the government surely cannot. This explains why only Rs 23 crore each were raised through FPOs in 2008 and 2009.

The NTPC price, on the heels of the bad pricing for National Hydro Power Corporation (NHPC), has resulted in keeping the retail investors away, and has made them more suspicious of future PSU issues also. This surely is bad news.

Until new thinking is done, the entire divestment programme may go into a limbo. See this space tomorrow for “Going forward”.

The author is CMD, Prime Database

First Published: Wed, February 10 2010. 00:01 IST