Wednesday, January 28, 2015

Retail investors' guide to the Coal India mega share sale

The government will sell up to 10% stake in Coal India, the country’s eight-biggest firm in terms of market value on Friday. The share sale is being done through the offer for sale (OFS) route. The core issue is of 15.8 million shares, or 5% stake, with a so-called green-shoe option of selling another 15.8 million shares or 5%. The total issue size is likely to be around Rs 22,000 crore, assuming the government offers further discount to the current market price of Rs 370 per share. The share-sale, if fully subscribed, will be the biggest-ever equity offering in the Indian market, topping the Rs 16,700 crore-worth of rights issue by State Bank of India in 2008 and Rs 15,500 crore-worth initial public offering (IPO) of Coal India itself in 2010. 

Here is a guide retail investors can use to invest in this mega offering:

What is an OFS?

Offer for sale, or OFS, is a relatively new mechanism meant for promoters of listed companies to dilute their holdings. Under this, the seller — in this case the government of India — uses a separate window provided by stock exchanges for selling their stake. This is different from an IPO or follow-on public offering (FPO), as they don’t use the stock exchange mechanism for conducting their share sale.

Who is a retail investor?

An investor investing up to Rs 2 lakh in the OFS will be considered as a ‘retail’ investor.

What are the benefits of investing in the retail category?

An OFS has to reserve a minimum of 10% of the total shares sold for retail investors. In case of Coal India, the government has reserved 20% share for retail investors. Assuming the issue size will be Rs 22,000, around Rs 4,400 crore-worth of shares will be meant for only retail, or small investors. All other category of investors will not have any special quota or reservations. Besides this, the bigger benefit of investing as a retail investor is that the government offers an additional discount of 5%. So for instance, if the Coal India share sale is priced at Rs 370, retail investors will be sold shares for Rs 351.5. Although, there is no obligation on the government or any seller to offer retail discount, but in almost all previous disinvestments the centre has offered such a discount. 

How should a retail investor apply?

Not just retail investors but other participants including brokers are not yet fully acclimatised to the OFS mechanism, which has been tweaked a number of times over the years. Therefore it is important that a retail investor calls his or her broker and understands the process and requirements. Typically, an investor has to call the broker during market hours (9:15 am to 3:30 pm) for placing their bids. While placing a bid the investor has to state the quantity and the price. 

What is the pricing for the Coal India OFS?

As per regulations, the seller has to disclose a floor price — the minimum price at which it intends to sell — to the stock exchanges a day prior to the share sale. So the floor price for Coal India share sale will be announced around 5 pm today. The government will also state the discount it plans to offer to retail investors.

Will the shares be sold at the ‘floor price’?

No. Floor price is the minimum price at which the government wants to sell its stake. Investors will have to bid at the floor price or at a higher amount in the OFS. The allotment process for an OFS is such that investors bidding at the highest price get an allotment first. If the bidding price is the same, those who put their bids first get the allotment. 

Will retail investors also have to bid?

Retail investors can either bid or apply at a cut-off price. If an investors applies at a cut-off price, the allotment price will be the price at which maximum bids are received. 

How will retail investors know the bidding price trends? 

Exchanges will disclose an ‘indicative price’ — which is the volume weighted average price of all the valid bids — at frequent intervals. They will also disclose the subscription figures, which will given an indication of the demand.

When will the allotment happen?

The allotment of shares in an OFS for retail investors and all others who bid with 100% margin happens on a T+1 basis. It means that the shares appear in the account the next day of the trade. This is unlike an FPO, where the allotment process takes up to two weeks. 

What are the chances of allotment?

As this is a huge offering, the chance of an investor getting full allotment is highly likely. So if you make a bid of Rs 2 lakh, you will get shares worth the entire amount. Assuming all retail investors apply at the upper limit of Rs 2 lakh, it will require around  220,000 applications from retail investors for their quota to get fully subscribed. The hugely-successful Coal India IPO had got over 1.6 million applications, with average application size of Rs 68,000. However, retail participation in previous OFS' have been very low compared to that in IPOs.

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