The Indian government did manage to raise the minimum Rs15.14 billion ($279 million) targeted from its auction-style sell-down in Steel Authority of India (known as Sail) last Friday, but it wasn’t particularly smooth sailing.
The deal was reduced in size at the last minute from 10.8% of the outstanding share capital to just 5.8% and, according to stock exchange data, it was still only 100.4% covered.
In fact, it appears that at least two-thirds of the deal was taken up by Life Insurance Corporation of India (LIC) and other state-owned entities, as well as domestic mutual funds, suggesting a large degree of state support for the final government divestment in the current fiscal year, which ends this week. Initially, local media put LIC’s investment alone at between 35% and 40%.
However, in a filing to the Bombay Stock Exchange yesterday, LIC said it had acquired an additional 169.64 million shares in Sail at the end of last week through the government sell-down and purchases in the open market, increasing its stake in the steel producer to 9.13% from 5.023%. It didn’t specify exactly how many shares it acquired in last Friday’s offering, but if it had bought all of them this way, it would have accounted for just over 70% of the total deal.
LIC has previously come in to rescue the government’s divestments when demand from other investors has been muted, most notably in the $2.5 billion sale of shares in Oil and Natural Gas Corp (ONGC) in late February last year. According to local media, the state-owned insurance giant has participated in most of the government’s sell-downs in the current fiscal year.
The demand from international investors for Sail was described as lukewarm at best, although estimates of exactly how much they subscribed for ranged from about 15% to 30% of the total deal. Unlike it did after the earlier sell-downs in Oil India and NTPC, the government hasn’t released any official data on the source of the demand.
One source close to the offering said some international investors did see value in the stock at current levels, while another argued that investors in general don’t have a lot of confidence in Sail at the moment as the company has not been able to deliver on its expansion plans.
When the one-day subscription opened on Friday last week, the share price was at a four-year low after falling 36% since the beginning of this year, including a 9.4% drop in the past week. The government’s decision to still go ahead with the sale suggests it was quite desperate to raise another few billion rupees to help meet its budget deficit target (5.2% of GDP) for the 2013 fiscal year — an important step in order to avert the risk of having its credit rating downgraded.
The government had initially targeted to raise $300 billion ($5.6 billion) from divestments in state-owned entities (formally known as public sector undertakings, or PSUs) this fiscal year, but in connection with the budget announcement for the next fiscal year in late February it revised this target to Rs240 billion ($4.4 billion). However, the smaller-than-intended divestment in Sail and a planned sell-down in Metals and Mining Trading Corp (MMTC) being scrapped altogether, mean it will only just reach its revised target.
Earlier this month, the government also raised $116 million from the sale of a 5% stake in National Aluminium Co (Nalco) — reduced from an initial plan to sell 10% — and about $57 million from the divestment of a 12.5% stake in Rashtriya Chemicals and Fertilizers. Together with earlier transactions and including the sell-down in Sail, this means it has pocketed about $4.4 billion from its divestment programme this fiscal year.
Sources said the government realised a few days before the sell-down in Sail that there was unlikely to be much demand from international investors and as a result decided to cap the deal size at a 5.8% stake. It was also clear, one source said, that price wasn’t really the key issue and that a lower price would make little difference in terms of attracting more international names to the deal.
Hence, the government seemingly chose to maximise the proceeds instead. The floor price was set at Rs63 per share, which translated into a discount of only 1.4% versus last Thursday’s closing price of Rs63.90. That compared to discounts of 7.9% on the $1.1 billion sell-down in mining company NMDC in December last year, 5.6% on the $590 million divestment in Oil India in January and 4.5% on the sale of $2.14 billion in power producer NTPC in February. All three of these deals were well received by both domestic and international investors and in all three cases the lowest accepted price (the clearing price) was at a premium to the floor price.
This was not the case for Sail. According to stock exchange data, the clearing price was equal to the floor price at Rs63, while the average price of the bids received (also referred to as the indicative price) was marginally higher at Rs63.07. The government hasn’t announced the average selling price, but it is probably safe to assume that it too is very close to the floor price, meaning the total proceeds won’t be much above the minimum $279 million.
The government sold approximately 240.4 million shares and reduced its stake in the steel producer to 80% from 85.8%. It still has the option of selling another 5% in the next fiscal year to trim its stake to 75%, as per its original plan.
Investors put in bids for about 241.3 million shares. Sail’s share price fell 0.9% to Rs63.35 on Friday while the offering was open and has lost a further 3.7% in the past couple of sessions, finishing at Rs61 yesterday.
The deal was done through a so-called offer for sale (OFS) with multiple clearing prices. This meant that investors put in bids for how many shares they want to buy and at what price, and assuming they are above the cut-off point (the lowest allocated price) they will each pay the price they bid. The highest bids are allocated first and in full, while lower bids are honoured in falling order as long as there are shares left.
The Sail OFS was arranged by Axis Capital, Deutsche Bank, HSBC, J.P. Morgan, Kotak Mahindra and SBICAP Securities.
For the coming fiscal year, which starts on April 1, the Indian government has set a pretty aggressive divestment target of Rs558 billion ($10.3 billion) — more than double the revised target of Rs240 billion for this year. Analysts and bankers have noted that the sales are likely to be front-loaded given the expectations of a general election in the spring of 2014 and several state elections in the fourth quarter of this year. However, this could be challenging given that metals and mining isn’t a favoured sector right now.
A big chunk of the divestments, potentially as much as $3.5 billion, are expected to come from the sale of a 10% stake in Coal India. Other potential stake sales that could bring in at least $1 billion each include ONGC, NTPC, Indian Oil Corp and NMDC, according to a report issued by Kotak Institutional Equities Research.
In a separate report issued last week, three Kotak analysts argued that the government should meet its fiscal targets for fiscal 2014 through enhanced dividends from state-owned entities, rather than direct sales. It can still reduce its stake at a later date after improving the financials of these companies through a better policy framework, which should allow it to achieve a much better valuation, according to the report.
“With the top-10 PSUs sitting on Rs1.4 trillion of net cash (as of September 30, 2012), we believe the government can easily meet its fiscal targets without conducting ‘forced’ divestments,” the analysts said.
