From: Value Research
Date: Fri, Feb 19, 2010 at 10:48 AM
Subject: Daily Insight: Lessons from the NTPC Fiasco
To:
Dear Value Research Online Member,
The failure of the NTPC issue holds some useful lessons for the future of public sector issues.
Lessons from the NTPC Fiasco
Now that the dust has settled on the government's NTPC follow-on public offer (FPO) fiasco, it's interesting to note that by any sensible measure, the issue was undersubscribed by at least 50 per cent. Going by reports, it seems that about Rs 4,700 crore, out of the Rs 8,300 crore, of subscription was from the State Bank of India (SBI) and Life Insurance Corporation (LIC), and possibly other public sector banks and insurers. Now, the government can pretend whatever it wants to, but everyone knows that the issue was a complete failure and the fig leaf of success was orchestrated by getting the SBI and LIC to subscribe to the NTPC FPO.
It's interesting to note that if these events had happened in a private business group, then it would probably have crossed the borderline of legality. Here's the story: A business group needed to make good heavy losses it had suffered, so it decided to sell its stake in another, unrelated group business. The issue collapsed. It provoked negligible response among the retail public and even the companies' own employees. So the promoters of the group forced a bank and an insurance company they controlled to subscribe to the issue. Basically, this sham FPO amounted to transferring assets from the bank and the insurance company to an unrelated activity owned by the promoters.
I don't know about you, but I would say that this course of action followed by the promoters crossed the borderline of not only ethics, but is probably illegal. The clinching argument (one that demonstrates the promoter's greed beyond all doubt) would be that the bank and the insurance company were the highest bidders in the issue, and bid several percentage points higher than the ruling market price and the other bidders. Had this been a private business group, then the promoters should rightfully have been behind bars by now. The Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority (IRDA) and various other entities that regulate the players in this drama would have been asking some tough questions from the promoters and their advisors.
There are more ways in which the government's attitude resembles that of an unscrupulous promoter. The way the issue was priced showed that greed got the better of common sense. The entire focus was on squeezing the most money possible out of the investors' pockets. Forgotten were all those grand statements about the public sector being owned by the public. Funnily, even as the issue was open, one heard officials floating conspiracy theories about how bear cartels had hammered the price down from Rs 230 to Rs 200 and how they should be investigated. In reality, the stock had spent most of the previous six months at around 200. Briefly, in December, someone, probably the government's hired bulls, jacked it up to 230, or 240, but failed to sustain it there. Again, these are tactics that would do a shady private promoter proud.
Going forward, it should be clear to anyone who is applying any thought to the issue that unless the disinvestment program is done in a very different spirit, it is going to be an year-long fiasco. As it would deserve to be.
-- Dhirendra Kumar
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