Tata Steel decides to go for follow-on

Indian steel producer Tata Steel has decided to raise money through a follow-on public offering (FPO) and over the weekend set a price range that will allow it to raise between Rs33.86 billion and Rs34.77 billion ($746 million to $766 million). A portion of the deal (15%) will be available for potential anchor investors today and the subscription period for other investors will run from Wednesday until Friday.

Initially the company was thinking about issuing global depositary receipts (GDRs), or even non-voting shares. However, investors were not particularly keen on the latter and, after plans of the former leaked to the Indian press in the first week of January and the share price started to trend lower, the former became all but impossible to do. The reason is that GDRs have to adhere to a minimum floor price based on the average closing price over the previous two weeks and when the share price is on a downward trend the floor price is typically above the market price, making it impossible to issue the GDRs at a discount.

Based on Tata Steel’s 14-day moving average as of last Friday, the floor price would have been around Rs665, while the closing price on the National Stock Exchange of India on that day was Rs622.45. The floor price rule also applies to qualified institutional placements (QIPs), which are targeted only to institutional investors, but not to FPOs, making this an obvious choice for the company.

FPOs are structured more like an IPO with a portion earmarked for retail investors and a three-day online bookbuilding. They also allow for an anchor tranche, which is welcomed by institutional investors since it gives them a chance to buy a more meaningful stake, which is allocated in proportion to the order size. According to sources, there is huge interest from both international and domestic investors to participate as anchor investors in the Tata deal – to the extent that the entire deal could be covered by these orders alone.