psu public offerings: a win-win for all

PSU public offerings: A win-win for all

The PSU CEO ConclaveExploring Capital Market Opportunities

Organized by BSEKolkata, 27 March 2009

Prithvi HaldeaPRIME Database

Serious divestments were in sight…

•With Rs.15,000 crore of PSU divestments in 2003-04 through public issues, hope was generated that government had finally become serious about PSU divestments and more so about doing this through public offerings route.

•Change in the government in May 2004 changed all that.

•While stated intentions of majority in the government were noble on the divestment front, compulsions of coalition played mischief.

COMPANY ISSUE OPENING

DATE

FRESHCAPITAL(Rs.crore)

FRESH CAPITALAS % OF

POST ISSUECAPITAL

DIVESTMENT(Rs.crore)

DIVESTMENTAS % OF

POST ISSUECAPITAL

PUBLIC ISSUE

AMOUNT (Rs.crore)

MARUTI 6/12/2003 0.00 993.35 27.51 993.35IPCL 2/20/2004 0.00 1202.85 28.95 1202.85CMC 2/23/2004 0.00 190.44 26.25 190.44IBP 2/23/2004 0.00 350.66 26.00 350.66DCI 2/26/2004 0.00 221.20 20.00 221.20GAIL 2/27/2004 0.00 1627.36 10.00 1627.36ONGC 3/5/2004 0.00 10542.40 9.96 10542.40

TOTAL 0.00 15128.26 15128.26

NTPC 10/7/2004 2684.07 5.25 2684.07 5.25 5368.15TOTAL 2684.07 2684.07 5368.15

TOTAL 0.00 0.00 0.00 0.00

PFC 1/31/2007 997.19 10.22 0.00 0.00 997.19TOTAL 997.19 0.00 997.19

PGCI 9/10/2007 1989.63 9.09 994.82 4.55 2984.45BEML 6/27/2007 526.75 11.77 0.00 0.00 526.75REC 2/19/2008 819.63 9.09 819.63 9.09 1639.26

TOTAL 3336.01 1814.45 5150.46

TOTAL 0.00 0.00 0.00 0.00

7017.27 19626.78 26644.06

SOURCE : PRIME Database

2005-06

2006-07

2007-08

2008-09

PSU OFFERINGS THROUGH PUBLIC OFFERS

2003-04

2004-05

GRAND TOTAL

Going forward

•Given the political and social compulsions, full exit by the government leading to privatization can surely be put on the backburner.

•However, urgent need to evolve a national consensus for PSUs on

- part divestments, where post-offer control shall still substantially rest with the government - raising of fresh capital from the market for expansion programmes.

PSUs are high-quality for the capital market

•There are as many as 139 profitable CPSEs.

• In many cases, they are a monopoly/market leader.

• Implicit Government support is available to CPSEs, and for ever.

•These make for perfect capital market candidates.

Arguments in favour of PSU offerings are compelling

Benefits the Government with higher valuations post-listing

SNO. COMPANY % GOVT. HOLDING

PRIOR TO ISSUE

% GOVT. HOLDING

AFTERISSUE

VALUE OF GOVT.HOLDING ONISSUE DATE

(Rs.crore)

VALUE OF GOVT.HOLDING AS ON

20.03.2009(Rs.crore)

% GAIN /LOSS


LAST PSU CONF.31.10.2008

(Rs.crore)

% GAIN /LOSS

1 NTPC 100.00 89.50 45753.73 131025.41 186.37 105676.36 130.972 PGCI 100.00 86.36 18901.52 35076.87 85.58 26244.04 38.853 PFC 100.00 89.78 8758.83 13241.28 51.18 11144.32 27.244 REC 100.00 81.82 7376.67 6466.88 -12.33 4840.50 -34.38

80790.75 185810.44 129.99 147905.22 83.07


TOTAL

Benefits the PSUs

•Public holding increases transparency and accountability.

•Listing helps in better corporate governance and efficiencies

•Fresh capital helps in modernization/ expansion/ diversification

Benefits the capital market

•PSU public offering route provides much needed depth and width to our capital market; a grave scarcity of good listed companies and listed capital exists in the country that causes excessive speculation, volatility and gains/losses.

•Losses on PSU scrips are lesser.

SNO. COMPANY ISSUEOPENING

DATE

ISSUEAMOUNT(Rs.crore)

OFFERPRICE(Rs.)

MARKET PRICEAS ON

18.01.2008

MARKET PRICEAS ON

20.03.2009

% GAIN /LOSS

1 PFC 31/01/2007 997.19 85.00 231.10 128.50 -44.402 REC 19/02/2008 1639.26 105.00 129.90 * 92.05 -29.143 PGCI 10/09/2007 2984.45 52.00 133.15 96.50 -27.534 NTPC 07/10/2004 5368.15 62.00 239.20 177.55 -25.775 MARUTI 12/06/2003 993.35 125.00 842.00 711.30 -15.52

* Highest price on listing date : 12.03.2008

PSU OFFERINGS THROUGH IPOs - % GAIN / LOSS

SNO. COMPANY MARKET PRICEAS ON

18.01.2008

MARKET PRICEAS ON

20.03.2009

% GAIN /LOSS

1 SATYAM COMPUTER SERVICES LTD. 372.60 43.90 -88.222 DLF LTD. 1005.75 171.10 -82.993 JAIPRAKASH ASSOCIATES LTD. 418.95 79.85 -80.944 TATA STEEL LTD. 781.90 176.10 -77.485 RELIANCE COMMUNICATIONS LTD. 702.15 158.35 -77.456 TATA MOTORS LTD. 712.20 160.90 -77.417 RELIANCE INFRASTRUCTURE LTD. 2124.05 482.90 -77.278 HINDALCO INDUSTRIES LTD. 185.05 47.60 -74.289 ICICI BANK LTD. 1245.45 322.90 -74.07

10 LARSEN & TOUBRO LTD. 3930.10 1170.20 -70.22 @Note :

@ Bonus 1:1

SENSEX - TOP 10 LOSERS

Benefits the economy

•Millions of new retail investors can be brought to the capital market and household savings can be utilized to help grow the economy.

- (In a country of over 100 crore, we have only about 1 crore equity investors.) - (Less than 5% of household savings is moving into the capital markets)

Benefits the investors


DATE


OFFERPRICE(Rs.)

MARKET PRICEAS ON

20.03.2009

% GAIN /LOSS

1 MARUTI 12/06/2003 993.35 125.00 711.30 469.042 NTPC 07/10/2004 5368.15 62.00 177.55 186.373 PFC 31/01/2007 997.19 85.00 128.50 51.184 PGCI 10/09/2007 2984.45 52.00 96.50 85.585 REC 19/02/2008 1639.26 105.00 92.05 -12.33


PSU OFFERINGS THROUGH IPOs - % GAIN /LOSS

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

1000.00

1100.00

1200.00

Market Price

Offer Price

MARUTI UDYOG LTD.OFFER PRICE : Rs.125.00OPENING DATE : 12/06/2003LISTING DATE : 09/07/2003

50.00

100.00

150.00

200.00

250.00

300.00

Market Price

Offer Price

NTPC LTD.OFFER PRICE : Rs.62.00OPENING DATE : 07/10/2004LISTING DATE : 05/11/2004

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

Market Price

Offer Price

POWER GRID CORP.OF INDIA LTD.OFFER PRICE : Rs.52.00OPENING DATE : 10/09/2007LISTING DATE : 05/10/2007

50.00

70.00

90.00

110.00

130.00

150.00

170.00

190.00

210.00

230.00

250.00

270.00

290.00

310.00

Market Price

Offer Price

POWER FINANCE CORP.LTD.OFFER PRICE : Rs.85.00OPENING DATE : 31/01/2007LISTING DATE : 23/02/2007

50.00

70.00

90.00

110.00

130.00

150.00

Market Price

Offer Price

RURAL ELECTRIFICATION CORP.LTD.OFFER PRICE : Rs.105.00OPENING DATE : 19/02/2008LISTING DATE : 12/03/2008


DATE

OFFERPRICE(Rs.)


MARKET PRICEAS ON

20.03.2009

ISSUEAMOUNT ON

MARKET PRICE(Rs.crore)

GAIN /LOSS

(Rs.crore)

IPOs1 NTPC 07/10/2004 62.00 5368.15 177.55 15372.82 10004.672 MARUTI 12/06/2003 125.00 993.35 711.30 5652.56 4659.213 PGCI 10/09/2007 52.00 2984.45 96.50 5538.45 2554.004 PFC 31/01/2007 85.00 997.19 128.50 1507.52 510.335 REC 19/02/2008 105.00 1639.26 92.05 1437.08 -202.18

11982.40 29508.43 17526.03

FPOs1 ONGC 05/03/2004 712.50 10542.40 755.05 11171.98 629.582 GAIL 27/02/2004 185.25 1627.36 220.70 1938.78 311.423 CMC 23/02/2004 460.75 190.44 282.55 116.79 -73.654 DCIL 26/02/2004 380.00 221.20 214.25 124.72 -96.485 BEML 27/06/2007 1075.00 526.75 375.85 184.17 -342.58

13108.15 13536.43 428.28

25090.55 43044.86 17954.31

MERGED WITH OTHER COMPANIES1 IBP 23/02/2004 589.00 350.66 2 IPCL 20/02/1904 161.50 1202.86


TOTAL

TOTAL

GRAND TOTAL

PSU OFFERINGS THROUGH PUBLIC OFFERS - AMOUNT GAIN / LOSS

Benefits the social cause

•Divestment proceeds are now earmarked for the National Investment Fund to be utilized for social welfare activities.

Will help revive the capital market•This is the best time, as ever.

•There is nothing called an “opportune time”.

•With credentials not under question and with right pricing, investor response is assured.

•PSUs/Government should not await the revival of the market to float the PSU IPOs in the hope of getting better valuations. Private promoters can be greedy, Government should not be.

•Government should realize that such IPOs can actually be the instrument for the revival of the market and that PSU IPOs can become the harbinger of good markets.

•Remember that it was a PSU divestment- Maruti in June 2003- that had earlier led the recovery of the market.

3245

312633

38346935

62

331135

19 3632

3457

3329

3245

2812 29

89 3288

3262

2988 31

81

2991

2949 32

29 3377

3250

3284

3110

2998

2943

3337

4245 44

53

3455 36

21 3793

4907 50

4558

39

2000

3000

4000

5000

6000A

pr,0

1

May

,01

Jun,

01

Jul,0

1

Aug

,01

Sep

,01

Oct

,01

Nov

,01

Dec

,01

Jan,

02

Feb

,02

Mar

,02

Apr

,02

May

,02

Jun,

02

Jul,0

2

Aug

,02

Sep

,02

Oct

,02

Nov

,02

Dec

,02

Jan,

03

Feb

,03

12-M

ar-0

3

12-A

pr-0

3

12-M

ay-0

3

12-J

un-0

3

19-J

un-0

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09-J

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3

Jul,0

3

Aug

,03

Sep

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Oct

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Nov

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Dec

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SensexMARUTI UDYOG LTD. (532500)ISSUE OPENING DATE :12/06/2003ISSUE CLOSING DATE :19/06/2003DATE OF LISTING :09/07/2003

•Once the momentum starts, sentiments would improve.

• Investors have to be brought back to equity.

•As good a time as ever for government to - enlarge investors’ base and the capital market - revive the market sentiments, and - raise money that it so desperately needs.

3 types of PSU public offerings

•Only divestment, either fully exiting the company or through part divestment (like ONGC and IPCL)

•Part divestment-cum-fresh capital offering (like NTPC)

•Only fresh capital raising (like PFC)

Modalities of PSU public offerings

Only through the public offering route...

•This is totally criticism-free; allotments are to anonymous investors.

Only to the retail investors…

•No one can have opposition to the beneficiary being the common man!

•These are public enterprises and benefits of divestments should belong only to the public.

•Moreover, this policy would be politically correct.

•Does retail have the depth?

• It has now been clearly demonstrated that the domestic retail appetite is literally infinite for good offerings.


DATE


RETAILAPPLICATION

AMOUNT(Rs.crore)

RETAIL APPLICATION AMOUNT

AS NO.OF TIMES OF ISSUE AMOUNT

1 MUNDRA PORT & SPECIAL ECONOMIC ZONE LTD. 11/1/2007 1771.00 8113.43 4.582 CENTRAL BANK OF INDIA 7/24/2007 816.00 3534.27 4.333 RELIANCE PETROLEUM LTD. 4/13/2006 2700.00 11182.78 4.144 RELIANCE POWER LTD. 1/15/2008 10123.20 39918.97 3.945 PARSVNATH DEVELOPERS LTD. 11/6/2006 1089.77 3196.57 2.936 POWER FINANCE CORP.LTD. 1/31/2007 997.19 2804.16 2.817 POWER GRID CORP.OF INDIA LTD. 9/10/2007 2984.45 6674.91 2.248 RURAL ELECTRIFICATION CORP.LTD. 2/19/2008 1639.26 3567.69 2.189 INFRASTRUCTURE DEVELOPMENT FINANCE CO.LTD. 7/15/2005 1372.24 2530.50 1.84

10 SUZLON ENERGY LTD. 9/23/2005 1496.34 2659.67 1.7811 IDEA CELLULAR LTD. 2/12/2007 2443.75 2633.17 1.0812 JET AIRWAYS (INDIA) LTD. 2/18/2005 1899.35 1469.74 0.7713 LANCO INFRATECH LTD. 11/6/2006 1067.34 738.91 0.6914 HOUSING DEVELOPMENT & INFRASTRUCTURE LTD. 6/28/2007 1707.75 643.88 0.3815 IRB INFRASTRUCTURE DEVELOPERS LTD. 1/31/2008 944.57 247.08 0.26

11 of the largest 15 IPOs - FULL ISSUE SUBSCRIBED BY RETAIL ALONEPERIOD : 01.01.2005 - 31.03.2009


Full Issue Subscribed by Retail Alone

No. of Issues

%

> 10 times 36 12 5 - 10 times 39 13 1 - 5 times 130 42 < 1 time 104 33

309 100

HUGE RETAIL DEPTH01.01.2005-31.03.2009


DATE

NO. OF RETAIL

APPLICATIONS

1 RELIANCE POWER LTD. 1/15/2008 46230832 RELIANCE PETROLEUM LTD. 4/13/2006 19392743 POWER GRID CORP.OF INDIA LTD. 9/10/2007 12154904 FUTURE CAPITAL HOLDINGS LTD. 1/11/2008 11043765 MUNDRA PORT & SPECIAL ECONOMIC ZONE LTD. 11/1/2007 10993686 BGR ENERGY SYSTEMS LTD. 12/5/2007 8005287 PUNJAB NATIONAL BANK 3/7/2005 7762378 RURAL ELECTRIFICATION CORP.LTD. 2/19/2008 7397749 CENTRAL BANK OF INDIA 7/24/2007 727659

10 GUJARAT STATE PETRONET LTD. 1/24/2006 704877

RETAIL RESPONSETOP 10 PUBLIC ISSUES - BY RETAIL APPLICATIONSPERIOD : 01.01.2005 -28.02.2009


•And retail investors will come easily,with potential of significant gains, courtesy inherent under-pricing and credibility of PSUs.

•Some portion of IPOs can be reserved for domestic institutions.

Only through fixed price method…

•Retail investors are ill equipped for bookbuilding; in all past issues, over 97 per cent of them used the “cut-off” option.

At reasonable prices…

•To enlist greater participation of, and benefit, small investors, IPOs should be made at reasonable prices, and FPOs at a significant discount to the market price.

•This may not maximize returns for the government. However, wealth created by public enterprises through domestic public resources should be shared rightfully only with the public.

•Government/PSUs should not be concerned about lower valuations. This is public money going back to the public.

•Significantly, there would be no post-listing pressures/embarrassments. The PSUs would forever be in the Thank You list!

• In any case, the true price discovery will happen post-listing, and since the government would still be holding 90-95% of the stakes, its gains would be substantially higher than the small loss it will incur in pricing the IPOs low, as has been demonstrated in the past.

Increase in Government’s wealth post-listing

SNO. COMPANY % GOVT. HOLDING

PRIOR TO ISSUE

% GOVT. HOLDING

AFTERISSUE

VALUE OF GOVT.HOLDING ONISSUE DATE

(Rs.crore)


20.03.2009(Rs.crore)

% GAIN /LOSS


LAST PSU CONF.31.10.2008

(Rs.crore)

% GAIN /LOSS

1 NTPC 100.00 89.50 45753.73 131025.41 186.37 105676.36 130.972 PGCI 100.00 86.36 18901.52 35076.87 85.58 26244.04 38.853 PFC 100.00 89.78 8758.83 13241.28 51.18 11144.32 27.244 REC 100.00 81.82 7376.67 6466.88 -12.33 4840.50 -34.38

80790.75 185810.44 129.99 147905.22 83.07


TOTAL

As widely distributed as possible…

•Scheme for allotment should ensure as wide a distribution as possible. No individual investor should get more than Rs. 1 lakh in allotment.

- This will have another positive impact: a very wide distribution reduces post- listing selling pressure; large sales by institutional investors often destabilize the prices.

With physical mode,if desired…

•Allow investors to get allotment in physical mode.

•They would be saved from the hassles of opening demat accounts.

•They would also save on custodial charges; many investors may like to hold the “family silver” for long periods.

•Only for selling, demat account may be mandated.

Using ASBA process for applications…

•The ASBA process should be actively promoted ;this would save the investors from blocking their monies and from subsequent refunds mess.

And, with ESOPs/employee reservation.

•Critical to keep the employees happy as also to reward and retain the employees.

- This will have another positive impact: Labour Unions would not act as a deterrent/ become instruments for negative media coverage.

No question marks on credentials

•As public offerings would only be from profitable PSUs, hardly any negatives regarding the issuers’ credentials.

•Government paper offers to the retail investors the ‘safety of capital’ that they want and the comfort that PSUs will not go overboard on pricing.

Now ,some more suggestions…

PSUs should ask for special regulatory relaxations

Relaxation 1

Removal of Independent Directors clause

• Independent Directors are appointed by Ministries/and are political in most cases, and the PSU has no control over it.

• Such appointments take unnecessarily long time (as was seen in NHPC/Oil India, forcing them to defer their IPO by more than 1 year, and when they became complaint, the market conditions have forced them to defer. As such, 2 good IPOs that could have happened did not).

• Some of these directors may not add value.

• PSUs, unlike private sector companies, are subject to much more additional audit like CAG, Parliament ,CVC etc.

• In any case, despite non-compliance for more than 3 years by already-listed PSUs, SEBI has not taken any action, signifying non-seriousness/helplessness of this non-compliance.

•Compliance of this clause, if at all, can be insisted upon only if the appointment of independent directors is left in the hands of the Chairman/Board of the concerned PSU.

Relaxation 2

Relaxations in initial and continuing public holding % requirements

•PSUs should be encouraged to enter the capital market.

•10% or 25 % public holding requirement may not be possible on both initial and continuing basis due to size/political considerations.

•Recent moves to have a standard minimum public holding should be opposed.

Relaxation 3

Do away with IPO grading

•Given the nature and credibility of PSUs, along with an outstanding and long track record, IPO grading is meaningless.

• In any case, IPO grading has proved to be futile.

Some more suggestions…

Engage intensively with the labour unions/employees

•Explain to them the benefits to the PSU of listing.

•Explain to them the benefits to them due to listing.

Don’t announce issue dates until absolutely ready

•Change of dates erodes market confidence.

•Giving reasons of low valuations makes PSUs/Government appear greedy.

Business Line 14.03.2009

Business Line 20.02.2009

Financial Express 04.03.2009

Looking ahead…Things were finally appearing to be in place…

Business Standard 19.12.2008

Economic Times 02.03.2009

Economic Times 01.12.2008

But Elections were announced

•Elections have put every thing on hold.

•Hope things would move swiftly after the elections.

•That is at least the hope .Especially if NDA or UPA comes back to power.

• I am glad that the UPA in its manifesto has accepted my suggestions…

Thank you…

[email protected]

psu public offerings: a win-win for all

Documents

crore of psu divestments

psu public offerings

onlast psu

favour of psu offerings

crorevalue of govt

implicit government

sharesvalue of govt

holdingafterissuevalue