Offering incentives, by way of discounts, in public issues is no means to attract retail participation as there is hardly any correlation between discounts offered to retail investors and the response received by such investors in an initial public offering (IPO), follow-on public offering (FPO) or offer-for-sale (OFS).
As per Capitaline data, seven out of 18 government issues in the last three years received poor response from retail investors when compared with the overall success of the issue. Of these seven issues, four issues had offered discount to investors. In case of private companies, two of the previous four issues failed to attract public investors, with Bharti Infratel IPO being looked as the most unsuccessful issue of the recent times despite it offering a discount.
A cross section of brokers and merchant bankers opined that discount is considered a tool to attract retail participation, thereby, expecting good response in return. However, discount alone cannot help in winning confidence of retail investors.
?It is all about getting the pricing right. Discounts do help attract retail investors, but pricing is one of the foremost aspects that would help attract retail investors,? said V Jayashankar, senior ED, Kotak Investment Banking.
Data suggests that a majority of the issues offered 5-10% discount to offer price. Only Hindustan Copper OFS last November gave a steep discount of 42% to the prevailing market price. Even then, the issue had to be bailed out by the likes of Life Insurance Corporation (LIC) and public sector banks, led by State Bank of India (SBI). However, merchant bankers pointed that offering huge discounts may not work in favour if the quality of the issue is bad or the management is unclear of its objective of using stake sale proceeds.
?In case of Hindustan Copper, the offer price was not reflective of the prevailing market price despite the steep discount. The market float was low and people found it hard to justify a high multiple,? said Jayashankar, adding that future stake sale in the company would garner better response from investors.
Another merchant banker said that investors were more concerned about the valuations of the company. Hindustan Copper was trading over 40 times its one-year forward price-earnings (P/E), which was significantly high compared to other companies in the metal and mining space.
Data also showed that NMDC was trading around 10 times its one-year forward P/E after discount and was almost at par with its peers.
?Offering discount does not help if the pricing is incorrect. Discount is a gesture to attract extra participation,? said Manish Jain, deputy VP (investment banking), Axis Capital Markets.
The NMDC OFS was subscribed a 1.25 times despite offering a 7.55% discount to investors. In case of Bharti Infratel, the retail portion was subscribed just 0.19 times, while the non-institutional investors that largely comprise of high net-worth individuals subscribed 0.29 times to the issue even as the company offered R10 discount to the lower-end of the price band.
Many brokerages gave a miss to the issue as the valuations appeared expensive given the company?s poorer economics compared to global tower companies and given the lack of short-term growth opportunities for Bharti Infratel.
