The government on Thursday set the floor price — the base price at which it intends to sell its 10 per cent stake in Coal India — at Rs 358 a share, a 4.5 per cent discount to the last closing price. The share sale, if fully subscribed, will help the government mop up Rs 22,385 crore, including a greenshoe option, making it the largest-ever equity offering in the Indian market. It will also help the government achieve over half of the disinvestment target of Rs 43,425 crore for the current financial year.
Market players say the pricing and quality of the offering will see the issue sale through. State-owned financial institutions including insurance giant Life Insurance Corporation (LIC), public sector banks, domestic mutual funds and long-term foreign investors are likely to submit large-ticket applications, market players say.
Retail participation, however, is expected to be curtailed given the paucity of time for arranging the funds and technical difficulties. Retail investors will not be allowed to bid at the cut-off price as allowed by market regulator Securities and Exchange Board of India (Sebi) last month. This means investors will have to bid at a price higher than the base price of Rs 358 and hope to get an allotment, which would be done on a price-priority basis. Applying at the cut-off price would have done away with bidding as the allotment would have been made at the price at which most bids were received, mitigating chances of rejection.
“Very few people would be able to put together the required funds as there has been very little time in which to do it. Participation would be from those who already have a credit balance with their brokers. There is also the absence of a cut-off option. This would require retail investors to now make a judgement call on the price at which the sale is likely to happen which may be difficult. The overall response is likely to be a little bit low from the retail end,” says Hemang Jani, senior vice-president, Sharekhan.
Most brokerages have advised their clients to apply for the Coal India OFS. Assuming the issue is priced around the floor price, the allotment price for retail investors will be Rs 340, a price last seen in May 2014.
According to Sebi regulations, clearing corporations have to collect 100 per cent margins for retail bids. Some brokers say they will partly fund retail investors by using their funds.
“It is a bit of a short notice. People have shown interest but they have to pre-fund their accounts. Many only prefer to deal in cheques and those take time to clear. We will be providing some credit to some customers with whom we share a relationship so that they can participate,” said an executive director at a major retail brokerage.
Ashish Chauhan, BSE, CEO and MD, says the exchange will allow its brokers to deposit margins in the form of cash or cash equivalent for retail bids and also allow transfer of their unutilised margins from the equity cash segment to the offer for sale.
Historically, retail participation in government share sales done through the OFS route has been muted compared to that in initial public offerings or follow-on public offerings.
Market players say a public offering attracts more retail investors as it is less complex compared to an OFS and gives them enough time to arrange funds and understand the risk involved. If the retail portion is under-subscribed, the shares would be allotted to other investors.
The government has appointed six investment banks, including DSP Merrill Lynch, Credit Suisse, Deutsche Equities, Goldman Sachs, JM Financial, Kotak Securities and SBICAP Securities, to manage the share sale.
People in the know say the banks handling the share sale have provided a commitment to the government that there will be enough demand for the entire 10 per cent stake. If the issue is under-subscribed the government can sell shares in Coal India in a second tranche following a 10-day cooling-off period.