Indian government offers Oil India stake at 5.6% discount

The government has set a floor price of Rs510 for today’s sale of a 10% stake in the oil and gas producer, implying a deal size of at least $574 million.
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Oil India’s R&D centre
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<div style="text-align: left;"> Oil India’s R&D centre </div>

The Indian government has set a floor price of Rs510 per share for its sale of a 10% stake in Oil India that will take place today. The floor price translates into a 5.6% discount versus yesterday’s close and indicates a minimum deal size of Rs30.66 billion ($574 million) — assuming that it sells all the shares.

The sell-down will be done through an offer for sale (OFS), an auction-like method that was pioneered in early March last year with a $2.5 billion government sell-down in ONGC. That first deal turned out to be quite disappointing, but also exposed the potential flaws with the method and showed the government that it needs to offer a decent discount if it is to attract the interest of the broader investment community.

Since then, the process has worked much better and the latest government sell-down — a $1.1 billion offering in mining company NMDC in December last year — turned out to be a huge success. The floor price for that deal was set at a 7.9% discount.

The government is selling stakes in state-owned companies to help reduce its budget deficit. In the current fiscal year, which ends March 31, it has set a target to raise about Rs300 billion ($5.6 billion) and finance minister Palaniappan Chidambaram told investors in Hong Kong last week that it is on track to reach that.

In addition to Oil India, the government is also planning to sell a 9.5% stake in power producer NTPC this month, which could raise between $2.3 billion and $2.5 billion. According to sources, that sale may come as early as next week.

The Oil India sale will comprise approximately 60.113 billion shares and will reduce the government’s stake in the oil and gas producer to 68.4%. The deal will use multiple clearing prices, which means that investors will put in bids for how many shares they want to buy and at what price and the government will allocate shares starting from the highest bid down.

If allocated, investors will each pay the price they bid. The order books will be open between 9:15am and 3:30pm India time today.

Oil India’s share price gained 2.6% to a close of Rs540 on the National Stock Exchange yesterday and is up 15.9% so far this year, partly due to the government’s decision to deregulate diesel prices and reduce subsidy payments.

Partly because of these recent gains, today’s sell-down in Oil India isn’t expected to be as hot as last month’s sale in NDMC, which was 1.7 times covered. However, analysts note that the sector fundamentals are supportive at the moment, and even if investors may initially have hoped for a price below Rs500, the expectation is that the government will be able to sell all the shares on offer.

Citi, HSBC and Kotak Mahindra are arranging the transaction.

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