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Cairn India IPO fails to energise retail investors

The inital offering for the Indian oil and gas exploration company scrapes through, achieving a subcription rate of 1.14 times and raising $1.93 billion.
Cairn India closed its IPO on Friday, managing a subscription rate of 1.14 times on the back of demand from wholesale investors.

Cairn India offered 328,799,675 shares, excluding the greenshoe option, at a price range of Rs160 to Rs190 ($3.59-$4.26) per share in a fully bookbuild issue. On a gross basis the IPO raised Rs86.16 billion and the retail portion was one of the largest issuances ever by a non-government owned company.

Cairn Energy plc is an independent oil and gas exploration company listed on the London Stock Exchange since 1998. It incorporated Cairn India in August to consolidate its businesses and interests in India. With its revenue derived onshore and the buoyant India sentiment and stock markets, an IPO in India was always on the cards. Cairn Energy continues to own 69.5% of its Indian subsidiary.

Sir Bill Gammell, chief executive, Cairn Energy says: "On completion of this transaction, Cairn India will be the largest independent exploration and production company listed in India. I firmly believe that, through the IPO, we have created a world-class business which is ideally positioned to benefit from IndiaÆs rapid economic growth."

The issue went through a bit of a roller-coaster ride. Initial reports were that the issue was subscribed 1.31 times on day one but it finally closed just 1.14 times subscribed. Both the qualified institutional buyer and retail categories saw a number of applications withdrawn. In the QIB category subscription came down from more than twice on Thursday to 1.36 times at closing. In the retail category, subscription at some stage on Friday fell below half, according to market participants.

As per data filed with the Bombay Stock Exchange after the issue closed on Friday, QIBs bid for 269 million shares against an allocation of 197 million shares representing a subscription of 1.36 times. Within this category, foreign institutional investors bid for 161 million shares, domestic banks/financial institutions and insurance companies for 90 million shares and mutual funds for 18 million shares. The top 20 accounts were an impressive array of tier one, international accounts and domestic institutions. Non institutional investors bid for 16 million shares against an allocation of 33 million representing a subscription of just 0.48 times. The retail portion fell marginally short with bids received for 89 million shares against an allocation of 99 million, representing a subscription level of 0.91 times.

A number of reasons are being cited for the lacklustre response. The IPO faced an unexpected issue just before it opened when Oil and Natural Gas Corporation complained to market watchdog, SEBI. ONGC said that some of the disclosures made in the draft red herring prospectus misrepresented some facts, failed to mention others and on an overall basis could impact the credibility of ONGC subsidiary, Mangalore Refinery Petrochemical. This caused some nervousness among investors about the relationship between Cairn India and ONGC. Timing of the ONGC complaint could not have been worse for the IPO as it happened while Cairn India was in the final stages of pre-issue marketing.

Then the stockmarkets in India lost more then 5% on Monday December 11, the day the issue opened, and continued to lose ground the next day. The Sensex closed down 1,000 points from the high of 14,000 it had scaled, over the course of the two days. Although markets bucked the trend and recovered on Wednesday, sentiment was still shaky. Indeed, sources close to the deal attribute a large number of the withdrawals in the first two days to the Sensex volatility. Market observers also felt that the issue may have suffered year-end blues. Many funds and institutional investors are in calendar year end closing mode and may not have invested simply because of timing.

Between November 23 and 27, Cairn placed 12% of its equity to a consortium of strategic and financial investors at Rs176.48. The largest investor was Petronas who will hold around a 10% stake post IPO. Videocon, Merrill Lynch, ABN AMRO, Citigroup Global Markets and Datavision Systems acquired the balance shares.

DSP Merrill Lynch and ABN AMRO Rothschild acted as global coordinators and bookrunners. JM Morgan Stanley was lead manager.
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