Fwd: Govt.must ensure that Coal India IPO benefits retail investors first

---------- Forwarded message ----------
From: <info@karmayog.org>
Date: Sat, Oct 16, 2010 at 11:38 AM
Subject: Govt.must ensure that Coal India IPO benefits retail investors first
To: palashbiswaskl@gmail.com

Government - owned Coal India Ltd. is set to open its Initial Public Offering on Monday, 18th October 2010.

Coal India Limited is the world's largest producer of coal and is one of India's National Assets.
One of the Government's stated objectives in bringing out IPO's of national assets is for "spreading the equity cult in the country".

 

The issue size is of Rs.15,000 crores ( more than US$ 3 billion), i.e. shares worth Rs. 15,000 crores will be available for purchase. This is 10% of Coal India Ltd.'s equity, i.e. only a small amount of the company will be in the hands of shareholders, apart from the government. A part of this 10% is reserved for retail investors.

 

A retail investor is defined as a person who invests between Rs. 5000/- to Rs. 1,00,00/-. An individual cannot make multiple applications. The balance of the issue is for commercial investors like Foreign Institutional Investors (FIIs), Mutual Funds, High Networth Individuals (HNIs), etc.

 

Governments usually take out a public issue at a price which is considered cheaper than other similar shares which are already listed in the stock exchange. It therefore becomes relatively low risk for investors. Typically, such shares are offered at a 10-20% discount as compared to what a private organisation would have issued them at.

 

In addition to this pricing, since the government has a stated objective of "spreading the equity cult in the country", and therefore wants individuals to invest in the stock market and become shareholders and owners of Indian companies and thus benefit from the prosperity of the nation and growth and profit of individual companies, the government offers a further 5% additional discount to retail investors vis-a-vis other investors.

 

The Coal India issue is expected to be handsomely oversubscribed. So if you as a retail investor were to invest Rs.25,000/- in the public issue, you may actually receive shares of only Rs.5000/-.

 

A bold but fair thing to do would be for the government to first fill ALL the retail applications before issuing shares to the commercial or rich investors, i.e. the shares which are left to be alloted after the public has received the shares, can be distributed pro rata to other investors (i.e. in proportion to the amount that they have applied for)

 

This would have the added advantage that when the issue is listed and commercial investors are interested in buying large amounts of the stocks for their long term holdings (or short term trading), they would have to buy these from the retail investors, thus giving retail investors a benefit of price increase due to this demand.

 

Normally what happens is the opposite, i.e. the large investors get a larger share of the pie which they sell in the first few days of listing, leaving the retail investors high and dry when prices fall when such large volumes come into the market.

 

Therefore, the government should make a law for IPOs (at least PSU ones) that shares will be alloted first to retail investors and therafter, the balance shares to other types of investors.

 

Please comment via http://www.karmayog.org/messages/message.aspx?id=3434

Regards,

Vinay

www.karmayog.org

 

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Palash Biswas
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