India raises $3.6b after cutting Coal India stake

Demand underscored global investor confidence in India and set up equity sales for other state-owned entities.

India has raised Rs226.1 billion ($3.6 billion) after selling a 10% stake in state-run Coal India to the market, giving the government's faltering divestment drive a much needed boost.

The share sale will help the government towards its goal of raising $10 billion by selling minority stakes in state-owned companies, an effort to lower the fiscal deficit.

Decent investor response will undoubtedly lead to more equity issuance in near future in other state-owned firms such as Oil and Natural Gas Corp and Power Finance Corp.

Books opened on Friday with a floor price of Rs358 per share, representing a 4.5% discount to the January 29 close of Rs375.15 on the Bombay Stock Exchange, according to a term sheet seen by FinanceAsia.

The government initially aimed to raise Rs113.1 billion to Rs226.1 billion ($1.84 million to $3.68 million), with 20% of the offer reserved for retail investors. On offer were 315.8 million shares, with an option to upsize to 631.6 million, the term sheet said. All of the shares were secondary.

One banker close to the deal said that, once the floor price was set on Friday, the stock traded slightly down but that this was expected. "It probably traded a little towards the floor but [demand was still strong]," the banker told FinanceAsia. The base deal size representing 5% of the state-owned coal company's enlarged share capital, the banker added.

Shares closed at Rs360.85 per unit on Friday, a 3.8% slide from Thursday's closing price but the slide did not affect sentiment, with international and domestic demand for Coal India exceeding supply. The institutional book was oversubscribed by 1.07 times, a second banker close to the deal said, adding that investors placed orders for more than 675 million shares, against the 631.6 million shares on offer.

Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, Goldman Sachs, JM Financial, Kotak and SBICAP oversaw the share sale, one of India's largest ever.

The share sale brought India's ownership stake from about 90% to 79%.

It is the third largest ECM deal in India ever, behind only ICICI Bank’s $4.65 billion follow-on in June 2007 and the State Bank of India’s $4.25 billion placement in March 2008, according to Dealogic data.

Investors clearly bought into the energy story in Asia's third-largest economy as Prime Minister Narendra Modi pushes ahead with his privatisation scheme.

Coal India is the largest coal miner in the world and biggest supplier of coal domestically. Coal fuels roughly 60% of India's power production, and the state-owned producer is an important supplier to the country's power stations.

Still, India sits on the world's fifth-largest reserves and yet Coal India, which has a monopoly on commercial mining, has failed to meet demand on the rapidly growing economy. It is inefficiently run, misses production targets and has to deal with frequent worker strikes. And so, despite having a rich array of coal-reserves, India is the world's third-largest importer of coal.

Modi is focused on ending the government's 40-year monopoly by bringing in private companies. This will help meet demand, which is expected to rise as coal remains the mainstay of India's electricity production for years to come.

Indeed, the success of Friday's block underscores investors' confidence in the country's underlying story. Coal India shares are down 6% so far this year up to January 30 but the country's Sensex Index is up 8% year-to-date.

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