Can I interest you in a 5% discount?

by Manshu on March 4, 2010


Image by State Records NSW

The NMDC Follow-on Public Offer (FPO) is going to be the next big disinvestment by the Indian government. The low retail subscription to previous IPOs and FPOs coupled with the need to raise funds from disinvestment to plug the fiscal deficit is prompting the government to sweeten its deal for retail participants.

The red herring prospectus of the NMDC FPO states that retail participants will get a 5% discount on the price set during the book – building process, and even more interestingly - ET reports that the price band may be set at 30 – 35% lower than the current stock price of Rs. 435.

This is interesting because the government really needs some retail participation in these offers to raise sufficient amounts to meet the divestment target, and retail investors have not really been interested in these offers of late.

The sale will start on March 10 and end on March 12, and we will know the price band on March 8th. I plan to do an IPO post on NMDC before that, but I just wanted to do quick post about this discount, and at least one factor you should keep in mind while thinking about it.

I wanted to do it a little ahead of time because very shortly there will be a lot of news articles about the NMDC FPO, and this discount, and I expect little bit of frenzy as well.

I think retail investors should keep in mind that the discount given is on the current price, but not long ago the price of the stock was Rs.140 odd. This company is in the iron-ore business, which like any other commodity is cyclical in nature. Iron – ore prices have risen sharply in the last year or so, and so when you think about the 30% or 5% or whatever the final number turns out – you need to think about these other things too. This is not to say that the offer will be over-priced, and I might even invest in it myself though I am not decided about that yet. Just something for you to think about in case the frenzy becomes too much.

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