Jagannadham Thunuguntla of SMC Capitals Ltd, a Delhi-based brokerage, said the government is reading too much into the quality of its own companies. “They feel that these are good quality companies and investors will queue up to buy them. In the absence of good retail participation and FII (foreign institutional investor) money, the whole programme is becoming a joke. LIC and SBI subscribing to the shares is like the government moving money from one pocket to another,” he added.

1. NTPC fiasco forcing govt to review rules
This is the first follow-on offer under the new pricing norms that the capital market regulator, the Securities and
Exchange Board of India, introduced in October
Mumbai: A tepid response to the follow-on public offer (FPO) of NTPC Ltd has forced the
disinvestment ministry to explore ways to revise share-sale rules for state-owned firms. The
Rs8,286 crore issue received a lukewarm response from both retail and institutional investors. It
was subscribed just 1.2 times, and that, with the help of two large institutional investors—Life
Insurance Corp. of India (LIC) and State Bank of India (SBI).
The revisions aim to ensure higher retail subscriptions, offer more flexibility in the institutional
bidding process and may also involve a more attractive pricing of the forthcoming public issues
of large state-owned firms.
“We are in the process of analysing the issue and the present norms governing them. We will not
show any knee-jerk reaction... We are analysing whether changes are required in the existing
rules,” Sumit Bose, secretary, disinvestment ministry, told Mint.
The NTPC follow-on public offer, through which the government is divesting a 5% stake,
received a bare 0.16 times subscription from retail investors at a floor price of Rs201. A little
more than one-third of the offer was kept for retail investors.
This is the first follow-on offer under the new pricing norms that the capital market regulator, the
Securities and Exchange Board of India, introduced in October. The norms allow retail investors
to buy shares at the floor price while institutional bidders are required to bid at any price above
the floor price.
However, restricting an institutional bidder from lowering its bid price once a price is quoted is
preventing institutional investors from participating in FPOs, according to investment bankers.
In a conventional book-building process, an investor can change the bid price at any point of
time.
While most foreign institutional investors and local mutual funds bid at Rs202 for NTPC, LIC
and SBI placed their bids at Rs209, higher than the market price of Rs205.50 on 3 February
when the issue opened. Shares of NTPC lost at least 11% between 4 January, the first trading day
of the year, and 3 February.
The sale offered 204 million shares at a minimum price of Rs202 to institutional investors, but
foreign investors bid only for 18 million shares.

2. Even though the price set for the retail investors was at a 5% discount to the prevailing market
price of 1 February, the day pricing was announced, by the opening of the issue, the discount
shrank to 2% as the share price dropped.
Since there were not many takers for the shares reserved for retail investors, institutional
investors benefited. Their bids were at much lower prices than those of LIC and SBI.
Wiser from NTPC experience, the government is focusing on three critical issues: whether
institutional investors should be allowed to revise their bids downward during the issue; fixing
the floor price at around 10% discount to the prevailing market price to leave more cushion for
retail investors; and, calibrating the price of an issue in line with market volatility and liquidity
of the stock on offer.
“We are in discussions with the investment bankers at the moment, while the capital market
regulator could be involved in discussions at the second stage,” Bose added.
“An institutional bidder is allowed to either enhance the bid or withdraw from the issue after
quoting a price. There should be more flexibility and they should also be allowed to reduce their
original bidding price,” said a senior official at one of the banks that managed the NTPC issue on
condition of anonymity.
According to Prithvi Haldea, chairman and managing director of Delhi-based primary market
tracker, Prime Database, the share sale “was not rightly priced and so it didn’t fare well. Retail
investors invest only when they get shares at 10-20% discount to the market price. The

3. government’s greed resulted in a lukewarm response and if the government repeats this, the PSU
divestment programme will face trouble.”
According to www.bsepsu.com, a website of the Bombay Stock Exchange dedicated to share
sales by state-owned firms, the government plans to raise Rs17,121 crore through 8.38% stake
sale in NMDC Ltd, and Rs4,181 crore through 5% equity sale in Rural Electrification Corp. Ltd.
The government also plans a 10% initial share sale in Satluj Jal Vidyut Nigam Ltd.
Jagannadham Thunuguntla of SMC Capitals Ltd, a Delhi-based brokerage, said the
government is reading too much into the quality of its own companies. “They feel that these are
good quality companies and investors will queue up to buy them. In the absence of good retail
participation and FII (foreign institutional investor) money, the whole programme is becoming a
joke. LIC and SBI subscribing to the shares is like the government moving money from one
pocket to another,” he added.
There are others who attributed NTPC’s failure to the unwillingness of the bankers to market
share sales by state-owned firms in the absence of incentives. Under current bidding norms, the
mandate to manage a share sale from a state-owned firm is awarded to investment bankers who
quote the lowest commissions. As many investment bankers tend to use such share sales as an
opportunity to market their own brands, they often agree to handle an issue without any
commission.
The bidding norms compel associate bankers too to help the lead banker in handling the issue,
even while bearing all expenses from their own pockets.
While this isn’t a new problem, it is now a crucial one because of the government’s focus on
divestment. Investment bankers have started demanding incentives for handling public issues,
and in a recent Mint report, Sidharth Pradhan, joint secretary, disinvestment ministry, has
indicated that the ministry is in a discussion with the vigilance commission to incentivize
investment bankers handling share sales of state-owned firms.
Arun Kejriwal, director of Kejriwal Research and Investment Services Ltd, a Mumbai-based
investment advisory firm, said the government’s unwillingness to pay investment bankers caused
the failure of the NTPC issue. Investment bankers who have mandates for the government are
responsible to provide pre- and post-issue support to the shares in the market (which means they
are vested with the responsibility of steadying the share price). “But the government is not giving
them any money; why will they provide support?”