Failure is the stepping stone to success – Probably, the theory does not work so well for the Indian Government. They have yet again decided to move forward with Rural Electrification Corporation (REC) Follow-on Public Offering (FPO) through the much debated French Auction methodology which proved to be a big failure in the case of FPO of yet another state owned company NTPC.
French Auction: The Indian Way
The government has fixed the floor price of Rural Electrification Corporation FPO at Rs.203 per share, which is at 7.8% discount to Wednesday’s closing price of Rs.220.15 per share. Under this offering, the government will divest 5% stake whereas 15% will be issued as fresh equity by the company. The issue will be open on February 19 and close on February 23.
The government has decided to follow the French Auction route for this FPO, which did not meet enough favor from investors during recent NTPC FPO, with minor tweaking in the methodology this time around, by giving institutional bidders the scope to revise their bid-both in terms of price and quantity.
Huge Pipeline of Expectation
With fiscal deficit at record highs of 6.8% of GDP plus off-budget subsidy burden, the government has a significantly big agenda at hand regarding disinvestment in various public sector companies in the years to come. With such a huge public offering pipeline, the government just can not afford to lose trust and faith of investors by pricing its issues high and with illogical methodologies.
While the current lot of offerings is only a miniscule part of the disinvestment plans executed till now, government needs to maintain its reputation as an able promoter of various companies with sound logics and firm footing in terms of its public offering perspective. The next in line of follow-up public offering from state owned group of companies is mining major National Mining Development Corporation (NMDC).
Do you feel Government will be maintain its reputation amongst investors as an able promoter as it moves forward to shore-up funds through disinvestment route?