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 year
2010) recently came out with an IPO. This IPO grossed Rs. 15,000 lakh
crores; the highest amount raised in India by a single offer, surpassing the
earlier record of Rs. 11,563 crores of Reliance Power. The tremendous
success of this IPO has a number of lessons for the Govt of India, investors
and Capital Markets. The article seeks to explain the process in a
simplified manner, highlight the various records and logically examine the
reasons for the same.

Q1) What is an IPO?

Ans. IPO stands for Initial Public offer. It is a process by which the
existing shareholders of a Company offer their shares for sale. After an
IPO the Company gets listed on a Stock Exchange to offer liquidity to the
investors. In case of CIL, the Govt of India was off loading 10% of their
stake 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, which

aims to raise a total of Rs. 40,000 crores by offering for sale its stakes in
Public Sector Banks (PSBs) and Public sector Companies (PSUs). The
disinvestment program would enable the GOI to raise funds and bring
down 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 is
therefore 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 year
high 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 to
counter the global meltdown following the US subprime crisis. GOI, in
order to stimulate consumption reduced taxes in order to lower prices of
goods and to leave more money in the hands of the consumers. In
addition, GOI increased its spending adopting the Keynesian approach
(Lord Keynes was a famous economist who proposed that in tough times
the 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 to
5.5% of GDP.

The success of the Coal India offer has increased the chances of GOI in
reaching 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. about
37% of the total target. This becomes even more striking considering the
fact that GOI has been able to raise only 5.2% from two earlier offers. The
issue 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 lakh
crores is 25% of the entire Indian Union budget of this year, more than the
Indian defence budget of Rs. 1.76 lakh crores, and ten times the Indian
Union health budget of Rs. 25,154 crores. It is more than the GDP of Shri
Lanka, Nepal and 140 other countries. The offer also set other records
even in category wise subscription.

Q6) What other records have been set?

Ans. Of the total, 50% shares were earmarked for Qualified Institutional
Bidders (QIBs) totaling $1.57 billion. This was oversubscribed 25 times
bringing in $ 38 billion. Thanks to this Offer a number of new Foreign
Institutional Investors (FIIs) have invested in the Indian markets for the
first time. Also of the 15% reserved for High Net Worth Individuals
(Individuals investing more than Rs. 1 lakh), there was an
oversubscription of 25 times.

Q7) What was the interest of retail investors (Individuals investing less
than Rs. 1 lakh) in the offer?

Ans. The retail portion received bids for 44.6 crores against the 20 crores
shares offered to them, Thus retail portion was oversubscribed 2.23 times.
Though this number looks small compared to the other categories of QIBs
and HNIs it is significant. The IPO received over 17 lakh retail applications,
the highest ever in a public sector IPO overtaking the 13 lakh retail
applications for NHPC. This goes to prove that if correctly priced, retail
investors would show interest in the primary markets. Also the average
retail 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 a
zero debt Company with more than $ 8 billion of cash reserves. Also as
India is a power starved nation, the demand for coal is expected to go up
by 11% This portends a good future for CIL. It has reported Rs. 15.60 per
Share and expects profits to rise by 25% in the current year. These factors
were highlighted very well in the road shows conducted for marketing.
However there are certain negative factors which marred the offer to a
small extent.

Q9) What were these negative factors & what lessons do they offer?

Ans. CIL had reserved 10% of the offer for its employees. This portion was
undersubscribed indicating that employees of CIL have not taken
advantage of a good opportunity. As on March 312, CIL had a total of 3,
97,138 employees the breakup being as follows: 15,092 executives,
38,475 supervisors and 343,571 workmen. A majority of workmen have not
subscribed to the Offer, clearly showing that the equity cult has still not
percolated down in the Indian capital markets.

Q10) What are the expectations of the Capital markets when CIL gets
listed?

Ans. The markets are eagerly awaiting the listing of CIL on the stock
exchanges on Nov 4th. They expect CIL to list at a minimum price of Rs.
300/-. At this price CIL will have a market cap of Rs. 1.89 lakh crores.
Markets are therefore expecting CIL to be debut among the Top 10 stocks
in Market Cap post listing. Note: Market cap is No Of shares multiplied by
the Market price.

Q10) What does this success portend for the future?

Ans. GOI is now more confident of meeting its target of disinvestment.

This IPO is a game changer as it signals a shift in investor interest towards
Asia from US. Asia which accounted for only 12% of IPOs in 1999 has seen
a six fold increase since. On the other hand, US which traditionally
dominated the Capital markets has seen its share decline by 75%. This
shift is clearly evident considering that this year, the collections of all US
IPOs has been equaled by collections from only 2 Asian Issues i.e. from
Hong Kong’s AIA issue and the CIL Issue.