Lessons from the Success of Coal India Ltd. (CIL) Offer
A bottle of honey can attract more bees than gallons of vinegar.
CIL, an Indian Public Sector Company and the world’s largest producer of coal (based on raw coal production of 431.26 million tons in fiscal year2010) recently came out with an IPO. This IPO grossed Rs. 15,000 lakhcrores; the highest amount raised in India by a single offer, surpassing theearlier record of Rs. 11,563 crores of Reliance Power. The tremendoussuccess of this IPO has a number of lessons for the Govt of India, investorsand Capital Markets. The article seeks to explain the process in asimplified manner, highlight the various records and logically examine thereasons for the same.Q1) What is an IPO?Ans. IPO stands for Initial Public offer. It is a process by which theexisting shareholders of a Company offer their shares for sale. After anIPO the Company gets listed on a Stock Exchange to offer liquidity to theinvestors. In case of CIL, the Govt of India was off loading 10% of theirstake in the Company.Q2) Why did the Govt Of India (GOI) offer their stake?Ans. The Offer is a part of a disinvestment program planned by GOI, whichaims to raise a total of Rs. 40,000 crores by offering for sale its stakes inPublic Sector Banks (PSBs) and Public sector Companies (PSUs). Thedisinvestment program would enable the GOI to raise funds and bringdown the budgetary deficit.Q3) What is budgetary deficit?Ans. Deficit refers to the shortfall in Income over Expenses of the Govt.The Govt makes up the deficit by borrowings. A high fiscal deficit istherefore alarming as it shows that Govt finances are spinning out of control. In case of GOI the budgetary deficit last year was at a 16 yearhigh of 6.9%.Q4) Why did the GOI have such a high deficit?Ans. This was primarily due to the stimulus package adopted by GOI tocounter the global meltdown following the US subprime crisis. GOI, inorder to stimulate consumption reduced taxes in order to lower prices of goods and to leave more money in the hands of the consumers. Inaddition, GOI increased its spending adopting the Keynesian approach(Lord Keynes was a famous economist who proposed that in tough timesthe Govt have to increase their spending). Now that normalcy is returning