Coal India kicks off the country's largest ever IPO

Investors subscribed to one-third of Coal India’s initial public offering of up to Rs154.75 billion ($3.46 billion) as the deal opened for subscription yesterday – a strong sign in a market where institutional investors have to put down 10% of the order amount when they submit their orders and hence tend to wait until the final day to do so.

The demand suggests that the government learnt from its latest sell-down in March this year, when it reduced its stake in the country’s largest iron ore producer, NMDC, to 90% from just over 98%. That transaction attracted a lot of interest, but because the price was deemed to be too aggressive, the offering ended just 1.25 times covered and had to be priced at the bottom of the price range.

The indicated valuations for Coal India are much more compelling, and in combination with the size – if successful, it will be the largest Indian IPO ever – this has grabbed investors’ attention. Of course, it also helps that the company is fundamentally strong and a direct play on India’s demand for energy. At a time when international funds continue to flow into India’s equity markets, a liquid vehicle that is able to capitalise on the country’s energy shortages is not going to go unnoticed.

Wholly owned by the government, Coal India is the largest coal producer, not just in India, but in the world, both in terms of raw coal production and reserves. Its production totalled approximately 431 million tonnes in the fiscal year to March 2010, while its reserves amount to 18.86 billion tonnes, according to Crisil Research.

This is the first sell-down by the government in the current fiscal year and will see it reduce its stake in Coal India to 90% as part of its efforts to reduce the budget deficit. The government is offering approximately 631.6 million secondary shares at a price between Rs225 and Rs245, which will allow it to raise between $3.18 billion and $3.46 billion. The offering will be open until Wednesday for institutional investors and until Thursday for retail accounts.

The deal doesn’t include an anchor tranche, which has become a common feature on Indian IPOs since it was introduced just over a year ago as it enables the bookrunners to allocate shares on a discretionary basis to what they deem to be longer-term investors. For the investors, it also offers an opportunity to buy a more meaningful stake in the listing candidate than what they can typically do through the online bookbuilding, where the shares are allocated on a pro rata basis.

However, sources say the government wouldn’t want to be seen to favour one investor over another and therefore has chosen to allocate all the shares on a pro rata basis.

The deal is arranged by Bank of America Merrill Lynch, Citi, Deutsche Bank, Enam, Kotak Mahindra and Morgan Stanley.