Opinion The listing sweet spot

For instance,the Rs 8,286 crore National Thermal Power Corporation (NTPC) follow-on issue,in February this year,flopped and had to be bailed out by LIC and the State Bank of India because of the mechanisms the government chose: it opted for the auction method and stipulated that institutional investors could only revise their bids upwards. Moreover,the 5 per cent discount to the market price wasn’t good enough,given that the price could fall as much in a single session.

While the government doesn’t need to give away shares for a song,what resulted in the NTPC case was that a large chunk of shares ended up in the portfolios of two investors,defeating the purpose: making the stock more liquid. The government then abandoned the auction process and went back to book-building for the Rural Electrification Corporation’s follow-on issue. However,while institutional investors subscribed to that issue in good numbers,and the government took home around Rs 3,500 crore,the retail quota was filled up only to the extent of 20 per cent. Meanwhile,there were problems of mispricing in the National Minerals Development Corporation issue; where analysts were looking at Rs 285 per share but only after pencilling in a large premium to global peers,the government chose to sell at the same price of Rs 285 to retail investors. The current market price is around Rs 255,which means investors are still out of money.

Fortunately,small investors made good money in the Coal India IPO,which is probably why the Shipping Corporation issue saw its retail quota receive a good response. With a few more IPOs and FPOs lined up,the collection target of Rs 40,000 crore for 2010-11 should be easily met: it already has Rs 24,000 crore in the kitty,with Rs 15,000 crore coming in from the Coal India IPO alone.

What seemed like a somewhat ambitious target in February has been achieved primarily thanks to the sweet spot that India finds itself in today,where it is probably the second fastest growing economy in the world,and also one to which global investors have a very small exposure. The government should continue to cash in on this — good times never last too long — and the best way to go about it,as we have learnt from the Coal India issue,is to price issues reasonably so that the money comes in from the right sets of investors.

The kind of opportunity the government has today — with the US’s second round of quantitative easing now a reality,flooding the market with $600 billion searching for returns — may not present itself again in a hurry. However,it’s not just enough to get a company listed; the government also needs to allow the managements of companies to function independently,if the stocks are to command high multiples on a sustained basis.

Stocks of firms like BEML or BEL,once in favour,have been languishing,because their managements haven’t been able to do the kind of business shareholders expected them to. The oil marketing companies trade at lower multiples than their global peers because prices of fuels like petrol and diesel are controlled,resulting in losses which need to be subsidised by the government. Given the poor visibility of earnings for these companies,it’s a wonder investors buy into them at all.

Stocks like MTNL,which is probably at the bottom of the heap in the telecom space,also don’t find a place in portfolios. On the other hand,stocks like BHEL or NTPC have done relatively well because they are in commanding positions in their respective sectors. The government is learning; it has announced a special dividend and bonus for ONGC shareholders hoping it will sweeten the deal before the oil major’s follow-on issue slated for January. It’s important for the government to continuously create wealth in PSUs. Given that it still owns large stakes in them,it stands to be the biggest gainer.

The writer is Resident Editor,Mumbai,‘The Financial Express’,shobhana.subramanian@expressindia.com