There had been a lot of hope that new regulations related to the sale of shares in listed Indian companies would improve the efficiency of the market and help increase the free-float and liquidity in a number of government-controlled companies in particular. But the first such offer for sale, which took place yesterday, cannot be described as anything but a huge disappointment.
The ingredients for a successful sale were all there. The target, Oil and Natural Gas Corp (ONGC), is a well-liked blue-chip that is riding on the huge demand for energy in India and the government’s sale of an additional 5% stake would make it more accessible to investors, while at the same time raise much needed capital to help the government plug its budget deficit. The sale has been postponed several times in the past year because of regulatory issues as well as volatile markets, but the current timing was excellent as Indian stock markets have started 2012 very strongly and investor risk appetite has seen a bit of a rebound.
The fact that the targeted deal size was about $2.5 billion also meant that investors would be able to get a meaningful stake.
However, this all fell flat after the sale drew very little demand from the broader market and while the government seems to have been able to raise its targeted funds, it had to call in other government entities to do the buying. With 10 minutes to go of the one-day subscription period, the orders covered only 3.4% of the total deal size, according to official data on the Bombay Stock Exchange website. But according to sources, in the final five minutes a number of government-controlled buyers, such as the wholly-owned insurance companies and state banks, came in with large orders that ended up covering almost all of the shares on offer.
It took a long time for the BSE website to include the last 10 minutes of the bidding process, but when it eventually did update it emerged that the final tally of bids was sufficient to cover 98.3% of the 427.77 million shares on offer — a huge pick-up in just a few minutes.
So, in effect, the highly anticipated sale has turned out to be little more than a mechanism for the government to transfer money from one entity to another. From the government’s point of view, perhaps this is a more palatable way of raising funds than to simply ask these entities to hand over the money to cover the deficit, but it certainly isn’t the best way to develop the capital markets.
A key issue is that the government, against the advice of the lead managers, chose to set the floor price for the deal at a premium to the market price. This was possible since the floor price isn’t calculated based on the actual share price performance (as is the case on qualified institutional placements), but rather can be set at any level deemed suitable by the issuer. However, by setting the price at a premium to the market, the government managed to lose the interest of a huge number of investors. Foreign investors, for example, didn’t really participate at all, sources said, which was in sharp contrast to the large interest among non-Indian investors when the management did a roadshow in September last year. Despite the interest, the government chose not to go ahead and launch the deal at that time, citing the volatility in global markets as a reason.
Sure, ONGC is a good company, but why would anyone want to pay a premium to buy it from the government when they could just as well buy the shares in the market at a lower price — especially since ONGC is a pretty liquid stock.
However, the buyers that came in just before the subscription period closed at 3.30pm India time, did just that since the stock was trading below the offer price at the time. In fact, sources said that these buyers also put in bids at a premium to the floor price, even though the chance of the deal being oversubscribed must have been minimal by then.
To be fair, ONGC’s share price did move above the floor price on Wednesday, on the back of the announcement of the deal terms after the market closed on Tuesday. One reason was that investors who had gone short the stock in anticipation of a deal were surprised by the fact that it came at a premium and were forced to cover their positions. However, the share price activity did seem somewhat odd.
The government said it would sell approximately 427.77 million shares at a minimum price of Rs290 apiece, which translated into a 2.3% premium versus Tuesday’s close of Rs283.40. At the floor price, the deal size would be Rs124.05 billion ($2.5 billion). However, orders at higher price levels could potentially increase the total order size, especially since the deal was to be settled at multiple clearing prices. The latter meant that each investor would be allocated shares at its individual bid price, as long as there were shares left to allocate. Conversely, if the bids didn’t cover all of the shares available for sale, the government could choose to either go ahead with a smaller deal, or to cancel the transaction.
There was no information on the BSE website last night about the minimum and maximum price at which the ONGC shares would be allocated, but one source said that the late bids came in at prices up to Rs295. If a portion of the shares were to be allocated at that level, it would partly compensate for the fact that the subscription amount didn’t cover all the shares on offer. If the total subscription amount of 420.4 million shares were to be sold at the floor price of Rs290, the government would raise approximately Rs121.9 billion ($2.47 billion).
ONGC’s share price gained 3.5% to Rs293.20 on the NSE on Wednesday and rose as high as Rs296.45 in the early morning yesterday before drifting lower again and finishing the session at Rs288 – down 1.8% on the day.
According to a circular published on February 1, offers for sale are open to companies with a free-float of less than 25% and also to the top-100 market cap companies in India. The intention is to enable the promoters to reduce their shareholdings in a quick and efficient way. The seller can choose to use a price priority methodology where investors who bid a higher price will get allocated in full before investors who put in bids at lower prices get any shares. Under this methodology, which is what ONGC used, each investor gets allocated at the specific price at which it subscribed for shares.
Alternatively, the seller can choose a proportionate basis methodology where investors get allocated at one single clearing price in proportion to the size of their orders.
Offers for sale will be done without a prospectus and are essentially targeted at institutional and corporate investors only. The subscription will take place during market trading hours on the second trading day after the deal terms are announced and must not exceed one trading day. The chosen floor price must be revealed to the regulator, but doesn’t have to be publically disclosed to the market, and the buyers must put up the full order value in cash at the time they submit their orders.
The ONGC deal was arranged by Bank of America Merrill Lynch, Citi, HSBC, JM Financial, Morgan Stanley and Nomura.
