PSU public offerings: A win-win for all Prithvi Haldea PRIME Database The PSU CEO Conclave Exploring Capital Market Opportunities Organized by BSE Kolkata, 27 March 2009 Serious divestments were in sight With Rs.15,000 crore of PSU divestments in 2003-04 through public issues, hope was generated that government had finally become serious about PSU divestments and more so about doing this through public offerings route. Change in the government in May 2004 changed all that.
While stated intentions of majority in the government were noble on the divestment front, compulsions of coalition played mischief. PSU OFFERINGS T HROUGH PUBLIC OFFERS COMPANY ISSUE OPENING DATE FRESH FRESH CAPITAL DIVESTMENT DIVESTMENT PUBLIC CAPITAL AS % OF (Rs.crore ) AS % OF ISSUE (Rs.crore) POST ISSUE POST ISSUE AMOUNT CAPITAL
CAPITAL (Rs.crore) 2003-04 MARUTI IPCL CMC IBP DCI GAIL ONGC 6/12/2003 2/20/2004 2/23/2004 2/23/2004 2/26/2004 2/27/2004 3/5/2004 TOTAL
PGCI BEML REC 2008-09 TOTAL GRAND TOTAL SOURCE : PRIME Database 7017.27 Going forward Given the political and social compulsions, full exit by the government leading to privatization can surely be put on the backburner. However, urgent need to evolve a national consensus for PSUs on - part divestments, where post-offer control shall still substantially rest with the
government - raising of fresh capital from the market for expansion programmes. PSUs are high-quality for the capital market There are as many as 139 profitable CPSEs. In many cases, they are a monopoly/market leader. Implicit Government support is available to CPSEs, and for ever. These make for perfect capital market candidates. Arguments in favour of PSU offerings are compelling Benefits the Government with higher valuations postlisting SNO.
1 2 3 4 COMPANY NTPC PGCI PFC REC % GOVT. HOLDING PRIOR TO ISSUE 100.00 100.00 100.00
100.00 SOURCE : PRIME Database % GOVT. HOLDING AFTER ISSUE 89.50 86.36 89.78 81.82 TOTAL VALUE OF GOVT. HOLDING ON ISSUE DATE (Rs.crore) 45753.73
18901.52 8758.83 7376.67 80790.75 VALUE OF GOVT. % GAIN / VALUE OF GOVT. % GAIN / HOLDING AS ON LOSS HOLDING AS ON LOSS 20.03.2009 LAST PSU (Rs.crore) CONF.31.10.2008 (Rs.crore ) 131025.41 35076.87 13241.28 6466.88 185810.44
186.37 85.58 51.18 -12.33 129.99 105676.36 26244.04 11144.32 4840.50 147905.22 130.97 38.85 27.24 -34.38 83.07 Benefits the PSUs Public holding increases transparency and
accountability. Listing helps in better corporate governance and efficiencies Fresh capital helps in modernization/ expansion/ diversification Benefits the capital market PSU public offering route provides much needed depth and width to our capital market; a grave scarcity of good listed companies and listed capital exists in the country that causes excessive speculation, volatility and gains/losses. Losses on PSU scrips are lesser. SENSEX - TOP 10 LOSERS SNO.
COMPANY 1 SATYAM COMPUTER SERVICES LTD. 2 DLF LTD. 3 JAIPRAKASH ASSOCIATES LTD. 4 TATA STEEL LTD. 5 RELIANCE COMMUNICATIONS LTD. 6 TATA MOTORS LTD. 7 RELIANCE INFRASTRUCTURE LTD. 8 HINDALCO INDUSTRIES LTD. 9 ICICI BANK LTD. 10 LARSEN & TOUBRO LTD. Note : @ Bonus 1:1 MARKET MARKET % GAIN / PRICE PRICE LOSS AS ON AS ON
-77.27 185.05 47.60 -74.28 1245.45 322.90 -74.07 3930.10 1170.20 -70.22 @ PSU OFFERINGS THROUGH IPOs - % GAIN / LOSS SNO. 1 2 3 4 5 *
COMPANY PFC REC PGCI NTPC MARUTI ISSUE ISSUE OPENING AMOUNT DATE (Rs.crore) 31/01/2007 997.19 19/02/2008 1639.26 10/09/2007 2984.45 07/10/2004
5368.15 12/06/2003 993.35 Highest price on listing date : 12.03.2008 OFFER MARKET PRICE MARKET PRICE % GAIN / PRICE AS ON AS ON LOSS (Rs.) 18.01.2008 20.03.2009 85.00 231.10 128.50 -44.40 105.00 129.90 * 92.05
-29.14 52.00 133.15 96.50 -27.53 62.00 239.20 177.55 -25.77 125.00 842.00 711.30 -15.52 Benefits the economy Millions of new retail investors can be brought to the capital market and household savings can be utilized to help grow the economy.
- (In a country of over 100 crore, we have only about 1 crore equity investors.) - (Less than 5% of household savings is moving into the capital markets) Benefits the investors PSU OFFERINGS THROUGH IPOs - % GAIN /LOSS SNO. COMPANY 1 2 3 4 5 MARUTI NTPC PFC PGCI REC
ISSUE ISSUE OFFER MARKET PRICE % GAIN / OPENING AMOUNT PRICE AS ON LOSS DATE (Rs.crore) (Rs.) 20.03.2009 12/06/2003 993.35 125.00 711.30 469.04 07/10/2004 5368.15 62.00 177.55 186.37
POWER GRID CORP.OF INDIA LTD. OFFER PRICE OPENING DATE LISTING DATE : Rs.52.00 : 10/09/2007 : 05/10/2007 Market Price Offer Price 310.00 290.00 270.00 250.00 230.00 210.00 190.00 170.00 150.00
130.00 110.00 90.00 70.00 50.00 POWER FINANCE CORP.LTD. OFFER PRICE OPENING DATE LISTING DATE : Rs.85.00 : 31/01/2007 : 23/02/2007 Market Price Offer Price 150.00 130.00
110.00 90.00 70.00 50.00 RURAL ELECTRIFICATION CORP.LTD. OFFER PRICE OPENING DATE LISTING DATE : Rs.105.00 : 19/02/2008 : 12/03/2008 PSU OFFERINGS THROUGH PUBLIC OFFERS - AMOUNT GAIN / LOSS SNO. COMPANY ISSUE
OPENING DATE OFFER PRICE (Rs.) ISSUE AMOUNT (Rs.crore) MARKET ISSUE GAIN / PRICE AMOUNT ON LOSS AS ON MARKET PRICE (Rs.crore) 20.03.2009 (Rs.crore)
SOURCE : PRIME Database Benefits the social cause Divestment proceeds are now earmarked for the National Investment Fund to be utilized for social welfare activities. Will help revive the capital market This is the best time, as ever. There is nothing called an opportune time. With credentials not under question and with right pricing, investor response is assured. PSUs/Government should not await the revival of the market to float the PSU IPOs in the hope of getting better valuations. Private promoters can be greedy, Government should not be.
Government should realize that such IPOs can actually be the instrument for the revival of the market and that PSU IPOs can become the harbinger of good markets. Remember that it was a PSU divestmentMaruti in June 2003- that had earlier led the recovery of the market. 2949 3229 3377 Oct,02 Dec,03 4453 4245
5045 4907 5839 ISSUE OPENING DATE :12/06/2003 ISSUE CLOSING DATE :19/06/2003 DATE OF LISTING :09/07/2003 Nov,03 Oct,03 3793 3621 5000 Sep,03
Apr,01 Sensex MARUTI UDYOG LTD. (532500) Once the momentum starts, sentiments would improve. Investors have to be brought back to equity. As good a time as ever for government to - enlarge investors base and the capital market - revive the market sentiments, and - raise money that it so desperately needs. 3 types of PSU public offerings
Only divestment, either fully exiting the company or through part divestment (like ONGC and IPCL) Part divestment-cum-fresh capital offering (like NTPC) Only fresh capital raising (like PFC) Modalities of PSU public offerings Only through the public offering route... This is totally criticism-free; allotments are to anonymous investors. Only to the retail investors No one can have
opposition to the beneficiary being the common man! These are public enterprises and benefits of divestments should belong only to the public. Moreover, this policy would be politically correct. Does retail have the depth? It has now been clearly demonstrated that the domestic retail appetite is literally infinite for good offerings. 11 of the largest 15 IPOs - FULL ISSUE SUBSCRIBED BY RETAIL ALONE PERIOD : 01.01.2005 - 31.03.2009 SNO. 1 2 3 4
5 6 7 8 9 10 11 12 13 14 15 COMPANY MUNDRA PORT & SPECIAL ECONOMIC ZONE LTD. CENTRAL BANK OF INDIA RELIANCE PETROLEUM LTD. RELIANCE POWER LTD. PARSVNATH DEVELOPERS LTD. POWER FINANCE CORP.LTD. POWER GRID CORP.OF INDIA LTD.
RURAL ELECTRIFICATION CORP.LTD. INFRASTRUCTURE DEVELOPMENT FINANCE CO.LTD. SUZLON ENERGY LTD. IDEA CELLULAR LTD. JET AIRWAYS (INDIA) LTD. LANCO INFRATECH LTD. HOUSING DEVELOPMENT & INFRASTRUCTURE LTD. IRB INFRASTRUCTURE DEVELOPERS LTD. SOURCE : PRIME Database ISSUE OPENING DATE 11/1/2007 7/24/2007 4/13/2006 1/15/2008 11/6/2006 1/31/2007
3567.69 2530.50 2659.67 2633.17 1469.74 738.91 643.88 247.08 RETAIL APPLICATION AMOUNT AS NO.OF TIMES OF ISSUE AMOUNT 4.58 4.33 4.14 3.94 2.93 2.81 2.24
2.18 1.84 1.78 1.08 0.77 0.69 0.38 0.26 HUGE RET AIL DEPT H 01.01.2005-31.03.2009 Full Issue No. of Subscribed by Issues Retail Alone > 10 times 36 5 - 10 times 39 1 - 5 times
130 < 1 time 104 309 % 12 13 42 33 100 RETAIL RESPONSE TOP 10 PUBLIC ISSUES - BY RETAIL APPLICATIONS PERIOD : 01.01.2005 -28.02.2009 SNO. 1 2 3
4 5 6 7 8 9 10 COM PANY RELIANCE POW ER LTD. RELIANCE PETROLEUM LTD. POW ER GRID CORP.OF INDIA LTD. FUTURE CAPITAL HOLDINGS LTD. MUNDRA PORT & SPECIAL ECONOMIC ZONE LTD. BGR ENERGY SYSTEMS LTD. PUNJAB NATIONAL BANK RURAL ELECTRIFICATION CORP.LTD. CENTRAL BANK OF INDIA GUJARAT STATE PETRONET LTD.
SOURCE : PRIM E Database ISSUE NO. OF OPENING RET AIL DAT E APPLICAT IONS 1/15/2008 4623083 4/13/2006 1939274 9/10/2007 1215490 1/11/2008 1104376 11/1/2007 1099368 12/5/2007 800528 3/7/2005
776237 2/19/2008 739774 7/24/2007 727659 1/24/2006 704877 And retail investors will come easily,with potential of significant gains, courtesy inherent under-pricing and credibility of PSUs. Some portion of IPOs can be reserved for domestic institutions. Only through fixed price method Retail investors are ill equipped for
bookbuilding; in all past issues, over 97 per cent of them used the cut-off option. At reasonable prices To enlist greater participation of, and benefit, small investors, IPOs should be made at reasonable prices, and FPOs at a significant discount to the market price. This may not maximize returns for the government. However, wealth created by public enterprises through domestic public resources should be shared rightfully only with the public. Government/PSUs should not be concerned about lower valuations. This is public money going back to the public. Significantly, there would be no post-listing
pressures/embarrassments. The PSUs would forever be in the Thank You list! In any case, the true price discovery will happen post-listing, and since the government would still be holding 90-95% of the stakes, its gains would be substantially higher than the small loss it will incur in pricing the IPOs low, as has been demonstrated in the past. Increase in Governments wealth post-listing SNO. 1 2 3 4
COMPANY NTPC PGCI PFC REC % GOVT. HOLDING PRIOR TO ISSUE 100.00 100.00 100.00 100.00 SOURCE : PRIME Database % GOVT. HOLDING
AFTER ISSUE 89.50 86.36 89.78 81.82 TOTAL VALUE OF GOVT. HOLDING ON ISSUE DATE (Rs.crore) 45753.73 18901.52 8758.83 7376.67 80790.75 VALUE OF GOVT. % GAIN / VALUE OF GOVT. % GAIN /
HOLDING AS ON LOSS HOLDING AS ON LOSS 20.03.2009 LAST PSU (Rs.crore) CONF.31.10.2008 (Rs.crore ) 131025.41 35076.87 13241.28 6466.88 185810.44 186.37 85.58 51.18 -12.33 129.99
105676.36 26244.04 11144.32 4840.50 147905.22 130.97 38.85 27.24 -34.38 83.07 As widely distributed as possible Scheme for allotment should ensure as wide a distribution as possible. No individual investor should get more than Rs. 1 lakh in allotment. - This will have another positive impact: a
very wide distribution reduces postlisting selling pressure; large sales by institutional investors often destabilize the prices. With physical mode,if desired Allow investors to get allotment in physical mode. They would be saved from the hassles of opening demat accounts. They would also save on custodial charges; many investors may like to hold the family silver for long periods. Only for selling, demat account may be mandated. Using ASBA process for applications The ASBA process should be actively
promoted ;this would save the investors from blocking their monies and from subsequent refunds mess. And, with ESOPs/employee reservation. Critical to keep the employees happy as also to reward and retain the employees. - This will have another positive impact: Labour Unions would not act as a deterrent/ become instruments for negative media coverage. No question marks on credentials As public offerings would only be from
profitable PSUs, hardly any negatives regarding the issuers credentials. Government paper offers to the retail investors the safety of capital that they want and the comfort that PSUs will not go overboard on pricing. Now ,some more suggestions PSUs should ask for special regulatory relaxations Relaxation 1 Removal of Independent Directors clause Independent Directors are appointed by Ministries/and are political in most cases, and the PSU has no control over it.
Such appointments take unnecessarily long time (as was seen in NHPC/Oil India, forcing them to defer their IPO by more than 1 year, and when they became complaint, the market conditions have forced them to defer. As such, 2 good IPOs that could have happened did not). Some of these directors may not add value. PSUs, unlike private sector companies, are subject to much more additional audit like CAG, Parliament ,CVC etc. In any case, despite non-compliance for more than 3 years by already-listed PSUs, SEBI has not taken any action, signifying non-seriousness/helplessness of this noncompliance. Compliance of this clause, if at all, can be insisted upon only if the appointment of independent directors is left in the hands of the Chairman/Board of the concerned PSU.
Relaxation 2 Relaxations in initial and continuing public holding % requirements PSUs should be encouraged to enter the capital market. 10% or 25 % public holding requirement may not be possible on both initial and continuing basis due to size/political considerations. Recent moves to have a standard minimum public holding should be opposed. Relaxation 3 Do away with IPO grading
Given the nature and credibility of PSUs, along with an outstanding and long track record, IPO grading is meaningless. In any case, IPO grading has proved to be futile. Some more suggestions Engage intensively with the labour unions/employees Explain to them the benefits to the PSU of listing. Explain to them the benefits to them due to listing. Dont announce issue dates until absolutely ready Change of dates erodes market
confidence. Giving reasons of low valuations makes PSUs/Government appear greedy. Business Line 14.03.2009 Business Line 20.02.2009 Financial Express 04.03.2009 Looking ahead Things were finally appearing to be in place Business Standard 19.12.2008
Economic Times 02.03.2009 Financial Express 18.03.2009 Economic Times 01.12.2008 Economic Times 01.12.2008 Financial Express 19.03.2009 But Elections were announced Elections have put every thing on hold. Hope things would move swiftly after the elections.
That is at least the hope .Especially if NDA or UPA comes back to power. I am glad that the UPA in its manifesto has accepted my suggestions Financial Express 25.03.2009 Thank you [email protected] 9810079895
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