Arun Shourie disappointed with retail response to NTPC FPO

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The NTPC FPO has been fully subscribed. The latest number reveals that the issue has been subscribed 1.2 times. The QIB segment has been subscribed 2.18 times while it has received a poor response from the retail investors, coming in at a mere 0.25 times.

However the management claims the issue has done well despite the market conditions.

In an interview with CNBC-TV18, Arun Shourie, Former Disinvestment Minister and Prithvi Haldea, Chairman, Prime Database gave their perspective on the FPO.

Here is a verbatim transcript of the interview. Also watch the accompanying video.

Q: What have you made of the NTPC FPO? The retail investor doesn't seem to be completely impressed by perhaps a blue chip company coming in from the government stable?

Shourie: I sincerely hope that the programme will succeed because the government's finances over the last few years were managed in such a way that deficits have reached proportions which cannot but lead to great problems for the country. We are seeing inflation, we are seeing the pressure on interest rates. So I sincerely hope that the programme will succeed. I am as disappointed as you are about the retail response. NTPC is one of our strongest companies.

I personally believe that power will be the next telecom sector in the country in leading growth and the reason why this probably has happened though we should hope that in this or in subsequent issues retail investors will get confidence and buy these, the reason why this disappointing response has happened is probably that this has been seen not as part of a reform programme of the government but as a measure of government offloading its equity only to raise resources to plug-in the deficit. That is always a reason why the retail investors do not get confidence.

Q: Poor response from the retail investor to the NTPC FPO. What did you make of it?

Haldea: If you design a bad product how do you expect demand? This is not a government diktat that I have an NTPC IPO and everybody in the country should invest in it. This is an offering; people have to find it attractive enough and I think the government has got it very wrong. The whole FPO has been designed and structured very badly and I have been saying right from the day when the structure was announced that this is not going to sail through.

FPO through a French auction method can work only in case of highly illiquid stocks where either you cannot get the quantities or when the price moves dramatically incase you place a significant order. In the case of NTPC that's not the scenario and therefore to expect any huge amount of bids at a price much higher than the floor price was a wrong expectation.

More importantly when you come to retail, on the one hand you keep talking about how to increase retail participation and your manifesto says that every Indian should own a public sector undertaking (PSU) stock. But when the opportunity comes through one of the best stocks in the country, you mess it up.

Why should retail invest in a company where the differential between the offer price and the market price is so narrow and with the kind of volatility that you have in the Indian markets, it makes no sense for the retail. Retail should have been offered 15-20% discount.

The notional loss of Rs 600-700 crore was peanuts in comparison to Rs 110,000 crore that the government has already made on NTPC. The difference between the valuation of the stock of the government holding on the date of the initial public offering (IPO) and today, the government is plus by Rs 110,000 crore. It should have been generous enough to offer Rs 400-500 crore, 20% discount and would have attracted retail investors in large numbers and that would have set the right trend for future divestments.

So I think both in terms of the French auction method as well as in terms of how the issue was designed for retail the government has got it wrong and it's a shame that a company like NTPC has become a subject of negative discussion today.

Q: A larger point on the divestment approach itself, the government hopes to fix its fiscal gap with the divestment proceeds. What is your view on the approach that this government has taken to execute its divestment plan?

Shourie: Of course this is what used to be done in the early 1990s when Dr. Manmohan Singh was the Finance Minister and Rs 18,000 crore were raised and they just vanished in the black hole of deficits. The character of the enterprises did not change and that is why everybody thought of going in for strategic sale.

But the IPOs that were done in Atal Bihari Vajpayee's time, I think in February 2004, there was very good response because they were seen as part of a general reforms programme in particular reforms about public sector enterprises. Here, the government for all sorts of reasons has just been not only shy but averse to announcing a reforms programme or showing a reforms urge in practice. And that is why it is clear that this has been done only for deficits.

Q: Some bankers argue that French auction model has actually worked, while the government wanted to raise USD 1.5 billion it has actually managed to raise over USD 2 billion. So while one may argue that the method has its flaws, the objective of the government has been achieved?

Haldea: Government could have achieved this objective by just doing a private placement. I mean we know that LICs and SBIs still would obey in a sense the government's orders of investing in a company like this. So they should have just gone through a private process and announced the price or ask them to bid.

For e.g. Maruti, the last tranche was done through a private bidding process. Then why do this FPO, you could have as well sold it on a private placement basis.