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Coal India IPO - Reasons for its success, and learnings for others

Coal India IPO - Reasons for its success, and learnings for others

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Published by: Balasubramanian Bhaskaran on Nov 29, 2010
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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
 
the GOI is striving to reduce its deficit and has set a target of deficit to5.5% of GDP.The success of the Coal India offer has increased the chances of GOI inreaching its target.Q5) What are the highlights of the success of the offer of CIL?Ans. The Coal India offer alone has raised 15000 crores for GOI, i.e. about37% of the total target. This becomes even more striking considering thefact that GOI has been able to raise only 5.2% from two earlier offers. Theissue was oversubscribed over 15 times, against the offer of 15000 crores.Thus the issue mobilised Rs. 2.36 lakh crores. This amount of Rs. 2.36 lakhcrores is 25% of the entire Indian Union budget of this year, more than theIndian defence budget of Rs. 1.76 lakh crores, and ten times the IndianUnion health budget of Rs. 25,154 crores. It is more than the GDP of ShriLanka, Nepal and 140 other countries. The offer also set other recordseven in category wise subscription.Q6) What other records have been set?Ans. Of the total, 50% shares were earmarked for Qualified InstitutionalBidders (QIBs) totaling $1.57 billion. This was oversubscribed 25 timesbringing in $ 38 billion. Thanks to this Offer a number of new ForeignInstitutional Investors (FIIs) have invested in the Indian markets for thefirst time. Also of the 15% reserved for High Net Worth Individuals(Individuals investing more than Rs. 1 lakh), there was anoversubscription of 25 times.Q7) What was the interest of retail investors (Individuals investing lessthan Rs. 1 lakh) in the offer?Ans. The retail portion received bids for 44.6 crores against the 20 croresshares offered to them, Thus retail portion was oversubscribed 2.23 times.Though this number looks small compared to the other categories of QIBsand HNIs it is significant. The IPO received over 17 lakh retail applications,the highest ever in a public sector IPO overtaking the 13 lakh retailapplications for NHPC. This goes to prove that if correctly priced, retailinvestors would show interest in the primary markets. Also the averageretail application was about Rs. 70,000 higher than the normal Rs. 40,000.Q8) What were the reasons for this resounding success?Ans. Apart from the largest reserves of coal, CIL has a good track record.It is a very profitable Company due to this low cost of production. It is azero debt Company with more than $ 8 billion of cash reserves. Also asIndia is a power starved nation, the demand for coal is expected to go up

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