LIC rushes to rescue ONGC share auction

The Life Insurance Corporation of India bailed out ONGC’s share auction on Thursday after it received tepid response from investors.

LIC made a revised bid for 12 crore shares at 3.32 pm, just after the markets closed — after a broker’s mistake led to the rejection of its earlier bid.

The auction had earlier received bids for just 29.22 crore shares against 42.77 crore shares on offer through the institutional placement programme route approved by the Securities and Exchange Board of India recently.

Experts blame the issue snafu on mispricing and lack of proper planning.

“The government got a bit greedy due to misguidance on merchant bankers’ part in setting the price. I am pretty sure the placement would have been a success if they kept the price band at around Rs270,” said S P Tulsian, an independent analyst.

The government, eager to raise Rs12,400 crore through the auction, had set the floor at Rs290 a share, which was at premium to Monday’s closing price of Rs283.55.

At 29.22 crore shares, the auction could garner only Rs8,500 crore based on the Rs290 floor price.

Anand Tandon, CEO at JRG Securities, believes it was a mistake to adopt the auction route for a highly liquid stock like ONGC, particularly since the price was not at a discount.

“Unless the stock is an illiquid or a fundamentally good one with little floating capital, the auction route doesn’t make sense,” said Tandon.

“Since ONGC has huge capitalisation and generates large daily volumes, it doesn’t make sense to bid unless there is a discount on offer or an institution has a multi-billion-dollar fund wanting to take a strategic stake. Even then, the offer for sale was only 5%, with restrictions on the number of shares one could bid for,” said Tandon.

Some also blamed the poor response on lack of homework on  the government’s part.

“It’s poor marketing on government’s part. You are not putting anything on the table for the investors and in a trading phase like this, when people want to make money in the short term. They should have priced it more attractively,” said Jigar Shah, head of research, Kimeng Securities.

What else could explain why ONGC was unable to attract investors for even 70% of its shares on offer when the public offer of MCX was subscribed more than 54.13 times?

Experts also believe that frequent change in ONGC’s subsidy burden has worked against it.

“One is not sure about how much profit they (ONGC) would be allowed to make as government dictates the same by asking it to share a part of the subsidy burden,” said Tandon.

Worse, the failure queers the pitch for future issues.

“Right now, given the setback government has received in case of ONGC, it would be better for them to remain quiet this fiscal, with only a month to go. Also, now the institutional investors will get an upper hand in the coming issues and they would most likely hammer the stock prices 2-3 days before the issue,” said Tulsian.

Also, there is no motivation for the investment banking fraternity to sell the shares, said an investment banker, who did not wish to be named. “When you heavily cut down on commissions, you also cut down the motivation to sell,” he said, adding that the ONGC misadventure will force a complete rethink of the auction exercise going forward.