There have been in the last two weeks two major stake sales, one by Citibank in the case of HDFC and the other by the Government of India in the case of ONGC. The two deals had very contrasting styles but would make interesting comparisons.
The details are as follows: -
Citibank sold its entire stake of 9.85% in HDFC to a group of investors which included FII’s and local investors. The issue was oversubscribed and was sold at an average price of Rs 657.56 which was at a discount of Rs 42.44 or 6.06% compared to the previous day’s close of Rs 700. The issue size was 14.53 cr shares and the stake sale at the transacted price was Rs 9,554.34 crs. The stock closed the day at Rs 676 which was a loss of Rs 24 to the previous day and a gain of Rs 18.44 to the average price at which the deal was done. This deal happened on Friday the 24th of February 2012. The closing price of HDFC on Saturday the 3rd of March was Rs 669 which is higher than the stake sale price.
The government of India invited bids for 5% in ONGC or 42.77 cr shares by way of auction to be conducted on the two exchanges BSE and NSE. The floor price fixed was Rs 290 which was a premium of Rs 6.45 or 2.27% to the price prevailing one day before the auction. The day of auction was the 1st of March where the response to the same was far from adequate and had to be bailed out by Life Insurance Corporation of India who bid for almost all of the 42.04 cr shares at a weighted average of Rs 303.67. The deal size at this price was Rs 12,766.77 crs. The stock closed at Rs 287.85 which was a loss of Rs 5.50 compared to the price of 29th February and a discount of Rs 2.15 to the floor price. It was also a loss of Rs 15.82 to the weighted average.
The similarity is in the size of deal and unfortunately it ends just there. HDFC stock based on 9 months results ending December 2011 on an annualised basis is trading at a PE of over 26 times while on a similar basis ONGC is trading at 9.25 times. It may be mentioned here that crude oil prices have been rising continuously and have reached the $125 mark.
The response to the HDFC deal was overwhelming and even though the issue was oversubscribed the allotment price was at a discount. In the case of ONGC though the response was poor and because of the faulty floor price which was priced at a premium to the market price, LIC which bailed out the issue did so at a premium. This act of bravado invites unsavoury comments and criticism and does not go in favour of either the government, or the buyer or the way the divestment programme is being carried out.
The auction which was done on the two exchanges did not present themselves suitably with the exchanges showing that with ten minutes to go for the auction time to end, the total bids received was a mere 1,43,85,097 shares against the quantity of 42.77 crs to be auctioned. Whatever maybe the reason thereafter the exchanges chose to become incommunicado for the next seven hours and chose to update the website only at around 10.30 pm. In the intervening period the electronic media had a field day and presented all sorts of versions and inside information, while the exchanges that had all the information chose to remain silent. What happened and what was happening will always remain a mystery and bring the entire process of bidding under a cloud. One is not sure what role was played by various parties like the exchanges, the government, the buyer, the merchant bankers, the custodian of the buyer, brokers of the exchanges and the regulator. One sincerely hopes, that to safeguard the interest of investors and maintain the credibility of the exchanges this issue is investigated and the findings be made public.
The present method of auction, the way information was disseminated or lack of information dissemination, the way the bailout was done leaves a bad taste and does not augur well for the markets. This is also likely to affect future divestment and should be an eye opener for the officials concerned that if a sought after share like HDFC has to be sold at a discount to the market price why should ONGC be priced at a premium. The wrong pricing and subsequent bailout is not a good omen and with the government likely to set a stiffer target for divestment in 2012-13 one hopes proper care is taken when pricing issues.
Clearly the lesson is there for all to see. Every secondary sale is normally done at a discount to the market price and irrespective of the stock or its market appeal, proper pricing always increases the demand. The right price at the right time would always fetch the seller the best realisation. One hopes this is a case study for future.