Initial public offering

A year ago Hutchison Essar was valued at $18.8 Billion by Vodafone. Bharti Airtel is today valued at $45Billion by Indian Stock Exchange. Reliance Communications (the company which made Cellphone a common man’s necessity) is valued at $38 USD.

Looking at this BSNL, the state owned Telecom Giant which has a huge fixed line, cellular, broadband and now IPTV business valuation at $100 Billion, looks cheep.
After all BSNL has the more infrastructure than any of them can even handle.
Also while all the other companies are creating SPV and hiving out tower business to keep depreciation cost to eat into their profitability, BSNL’s management inherited a nation wide infrastructure which is already depreciated to zero value.
Not only this, BSNL used to get as much as Rs 3,200 Cr INR p.a. from its competition as Access Deficit Charges to fund rural telephony and build infrastructure.

So essentially in a capital intensive operations like tele communications, BSNL is several years ahead of other players. Had it been under private control and had half the work-force, I won’t even bat an eye lid if their operations were evaluated at even $200 Billion.

But the question remains is India prepared for BSNL IPO?
SEBI laws force the company to offer a minimum of 10% of the shares for the public offering. Out of this 10%, atleast 30% has to be reserved for the Retail Investors. And going by the history of all IPO of the Public Companies, another 3-5% would be reserved for babus and government employees. So essentially BSNL has to raise some 3.5 Billion Dollars from the retail investors. (or 460 Billion INR).
Not a large sum, considering that India is a Trillion Dollar Economy and household saving rate is close to 30%. But the problem is that Government has put a cap of 100k INR for investments by small investors. So BSNL needs to entice about 4.6 Million investors to invest in the company.

Getting a million people to pay for a 50p candy is a big Marketing task. So consider how big a task is convincing 4.6million people to invest 0.1Million INR each… and that too within 5 days.
Companies like DLF, ICICI, and Relaince Power have tried all tricks. (5% cash discount, option of payment in installments (3 in case of ICICI FPO)) and yet their mega issues are barely subscribed. Sahara Group (one of the India’s largest conglomerate) is forced to carve its business to lots of smaller entities and break the Big IPO into several smaller ones (Its infrastructure IPO is expected to hit soon) SBI was forced for an rights issue because there was no way it could raise the kind of money it needed without dumping the shares at a throw away price. The problem is that Indians have money (reliance is raising billions of dollars every minute), but the laws are preventing them being channelized efficiently. The Corporate India badly needs funds to fuel the growth and boom which we are facing. With the curb in the External Commercial Borrowing (USD loans) and because of the high handedness of Indian banks, they do not have too many options.

I do not know whether India need a maverick who can expand the market and make India ready for the Mega Issues or should we keep our fingers crossed and pray for the day when SEBI would increase the limit on investments we make? But I do know that India may run out of steam if the Companies cannot raise funds fast enough.

This is another bit in my series of stock market basics (advanced readers please skip the post)

India is a booming economy and as the companies expand their operations, they need more and more of capital to fund it. Sometimes the company is able to raise these funds by issuing bonds, taking loans from Banks, internal cash flow etc. but often when the company is expanding exponentially its advisable to issue a fresh set of equity and raise funds by selling it. This could be done via Rights or via FPO.

FPO: Further public offering:
Its much like an IPO, but its an IPO of an already listing company.

Concerns of FPO:
Usually people accuse the promoters/management of a company raising money through FPO of diluting the equity and not rewarding the shareholders adequately.
But if the management is good, then the reality is just the opposite.
an FPO usually happens when the stock price is at all time high. So in reality the FPO induces a stickiness in the price. (People rarely like to book losses, esp in a good company.)
Secondly the funds raised only enables the company to continue its exponential growth and hence benefiting the stake holders (both post and pre-fpo)
Thirdly the very fact an outsider is ready to pay the price for the share is a display of the company’s strong fundamentals.
So an FPO is actually a good thing for the minority stock holders.

Rights Issue:
Its is almost like a FPO i.e.:
1. Fresh equity of an already listing company is raised.
2. The fresh equity is always at a discount from the prevailing market rate (except a rare case where the promoter issues rights share instead of warrants to raise his holding)

However the only difference is that:
1. in the rights issue, only the existing share holders are allowed to subscribe. So the shareholding pattern does not get significantly altered.
2. The allotment would be in proportion to the existing shareholding pattern on the record date. So one does not have to worry about over subscription and hence no/low allotment.
3. The FPO is usually at the prevailing rates (or at a 5% discount) so that the existing shareholder’s interests do not get hurt. But the rights issue is usually a significant discount from the prevailing market rate to encourage subscription and also enable the existing share holders to save taxes by booking paper losses.
4. This discount in prices leads to a significant fall in the share price of the company (post record date)… (but now since the investors have more shares, their wealth does not alter) And this fall gives room for booking of paper losses and getting tax shields.
5. But this introduces a downside. If a company issues a rights issue (at a significant discount) then the existing share holders have to invest in the company, else they will suffer a significant dilution of stakes and capital losses.

Usually the Rights issue is marginally under subscribed because some of the minority share holders are not able to submit their applications in time. There it is advised that who ever subscribes to the rights issue, should apply for slightly more than the guaranteed amounts and benefit from it.

PS: I have deliberately omitted all equations and charts. Please refer to investopedia for details.