Government offerings: Where do you fit in? - Views on News from Equitymaster

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Government offerings: Where do you fit in?

Mar 3, 2004

The primary market is abuzz with activity, thanks to a slew of equity offerings by the government aimed at filling up its coffers (primarily to meet the disinvestment targets). The amount likely to be garnered by the government through its offerings is in the vicinity of Rs 145 bn. However, while there are some companies like Patni Computer Systems (PCS), Power Trading Corporation and Petronet LNG tapping the Indian stock markets for the first time, the hype in the markets is basically owing to various secondary offerings by the government.In the case of secondary offerings (as those by the government currently), the current shareholders of the company sell a certain portion of their holding to investors (offer for sale) through the domestic/international stocks markets. While in case of an IPO, the equity can be bought 'initially' only through the IPO process, in case of offer for sale, since the company's stock is already listed on various stocks exchanges, it can be bought from the secondary market.

Considering that the government is accessing the domestic markets with a slew of secondary offerings, we conducted a poll on Equitymaster wherein we asked our readers whether they would prefer to buy the shares offered in government PSUs through the current offerings (primary market) or secondary market or whether they are at all interested in the whole IPO process. The results of the poll can be seen in the chart above wherein a majority (43%) preferred to opt for the secondary market followed closely (41%) by those who would subscribe to the current government offerings. However, 16% of the voters were not interested in the equity of government PSUs on offer.

Let us first consider the rational behind investors preferring to refrain from bidding for the government's equity offering and preferring the secondary market route instead. The first and foremost reason to stay away from the primary market could be going through the 'unnecessary' application procedure when the same stock can be acquired from the secondary market. Second reason could be the fact that investors' funds do get locked up for a particular period when the company receives the bids and the allotment is finalized. Moreover, getting an allotment in an IPO is very difficult in times of stock market bullishness as investor participation is on a very large scale. Thirdly owing to the fact that a large number of investors are very short-term in nature owing to various reasons, one of them being paucity of sufficient personal funds, they would not want to lock their funds for a certain period, especially when the stock is already available in the market. Another related reason to this could be the fact that since the behaviour of the stock on listing would largely be determined by the then prevailing stock market sentiments, investors would not want to risk their money.

Now, if we consider the second lot of voters who preferred to subscribe to the government offerings, these could largely be those who wouldn't mind locking their funds for some period, especially considering that the government is offering the equity at a discount to the prevailing market price. These investors could either have sufficient funds or have the advantage of access to loans being offered by various banks. There could also be the possibility that the investors opting for the primary market route are medium-to-long term investors who would continue to hold the stock irrespective of its listing gains/losses. There is also the possibility that investors could be liquidating their current holdings in order to subscribe to the government offerings.

The third community of voters who are not interested in government offerings could be again due to various reasons including lack of funds as they are already currently fully invested or they would want to stay away from the companies owned by the government or the mere fact that at the current valuations (due to the recent run up in the stock market), the stocks do not warrant a buy.

So, while here we did look at various reasons and possibilities which could have had led to an investor taking a particular stand with respect to the current government offerings, it must be noted that the above reasons are not exhaustive and there could be more reasons for an investors action. However, before we end our effort at recognizing investor behaviour here, our advice to investors would be to take a calculated and balanced view before investing in these IPOs and avoid the hype created in the primary markets. This is because while there would be a lot of quality issues hitting the market that deserve attention, simultaneously there would be some, which would not justify the valuations at which they would be offered. Hence, we would again like to re-iterate here the fact that invest in companies with fundamentally sound business models and transparent management, capable of delivering and increasing shareholder value.

For our view on various IPOs currently on and which are likely to commence in the near future, kindly visit the IPO Buzz! section on our website.

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