Rural Electrification Corporation (REC) Offer for Sale (OFS) – April 2015 Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at

Indian Governments have been known for acting as late as possible in taking important economic decisions. But, contrary to their reputation, this time they are acting fast, quite fast. Soon after getting over with a week full of holidays, the Government is quick to announce its decision to sell its 5% stake in one of its Navratnas, Rural Electrification Corporation (REC).

For financial year 2015-16, the Government has set a target for itself to raise Rs. 41,000 crore by selling its minority stakes and Rs. 28,500 crore by selling its controlling stakes in Central Public Sector Enterprises (CPSEs). To meet its target of Rs. 41,000 through minority stakes, the government has scheduled yet another offer for sale (OFS) on the stock exchanges tomorrow. This time the company is REC.

The government will be selling its 5% stake in the company i.e. 4,93,72,950 shares at Rs. 315 a share as the floor price. With 5% discount for the retail investors, the government will be able to raise approximately Rs. 1,540 crore from this share sale. Currently, the government holds about 65.64% stake in the company, which will come down to 60.64% post this OFS.

Before we check out the factors affecting our decision to invest in this OFS, let us first check the basic details of this offer.

Shares on Sale – The government has decided to offload its 5% stake in REC and will place 4,93,72,950 shares in the offer for sale, out of which 20% shares i.e. 98,74,590 shares will be reserved for the retail investors investing up to Rs. 2 lakh.

Offer Price – Share price of REC closed at Rs. 321.25 on the NSE today. The government has fixed Rs. 315 as the floor price in the OFS, which is a discount of 1.95% to its closing price. As always, the floor price has been disclosed by the government after market hours today.

5% Discount for the Retail Investors – Again, the government has decided to offer a discount of 5% to the retail investors. This discount will be offered on the price at which the retail investors bid in the OFS or the cut-off price set by the government, whichever is higher.

Brokerage – Unlike IPOs, stock brokers levy brokerage charges on these OFS transactions. These charges are normally higher than the rate of brokerage investors pay on their routine transactions. So, if the allotment price is fixed at say Rs. 317, the retail investors will get it at Rs. 301.15 a share plus applicable brokerage charges and taxes thereon. So, the retail investors should consider these charges in their overall cost of acquisition.

Introduction of Cut-Off price option still elusive – Offer for sale (OFS) process is still very complicated for the retail investors. They either require proper guidance or the option to bid at the cut-off price. But, this time also, the cut-off price option is missing.

Only a Single Day OFS – REC OFS will remain open for a single day only and that too, during the trading hours of the stock exchanges i.e. between 9:15 a.m. and 3:30 p.m. You’ll get to know the status of your bids by 6 p.m. and if successful, you’ll get the shares allotted by the designated stock exchange on T+1 basis.

Once bidding starts, you can check the bidding status on the National Stock Exchange as well as on the Bombay Stock Exchange.

How does an OFS process work?

If you are investing in an OFS for the first time and want to know more about the process, here is the link to check the details about it. If you have any query regarding the process, please share it here, I’ll try to respond to it as soon as possible.

How to invest?

You need to contact your broker to know how it is facilitating the bidding process. I think most of the broking firms must be providing the investment facility through their online platforms. If you don’t have access to the online platform, you should contact the customer care department of your broker and get the bid placed through telephonic confirmation.

Should you invest in REC OFS?

Power sector is one of the key drivers for a country’s rapid economic growth and poverty alleviation. Approximately 30% of India’s population do not have access to this basic amenity called electricity. For the past many many years, India’s power sector has been paralyzed with one issue or the other.

Poor financial condition of the state electricity boards (SEBs), unreasonable poll promises made by our politicians during elections, coal shortages due to scams/litigations or high import prices, poorly drafted laws of land acquisition, policy paralysis, shortage of funds or equipments for new capacities are some of the reasons due to which India’s power sector has shown an extremely poor growth.

However, the government is committed to provide electricity to all households over the next few years. Keeping that in mind, the government has recently taken many initiatives, including transparent & competitive auctions of coal mines, implementing gas price pooling policy, encouraging Coal India to meet its production targets etc. It makes me feel that the government is doing an excellent job at the ground level and it should start reflecting in growth numbers very soon.

REC is India’s biggest infrastructure finance company (IFC) for the power sector. Amidst a challenging environment for the power sector, the company has managed to keep its gross non-performing assets (NPAs) under control at 0.8%. Due to its low cost of borrowings, the company has managed to keep its net interest margins (NIMs) at a healthy 5.1% in the nine months period ended December 31, 2014.

From a long-term investment perspective, the stock price of the company is trading at extremely attractive valuations. Assuming the government to fix its allotment price to the retail investors at Rs. 300 per share, the stock is available at approximately 5 times its estimated earnings per share (EPS) and 1 time its estimated book value (BV) for the current financial year. It has also managed to keep its return on equity (RoE) above the levels of 20%. As the company is expected to post an earnings growth of around 30% in the next 3-5 years, its valuation of 5 times earnings seems strikingly cheap to me.

With the government moving in the right direction, an efficient minister heading the power ministry and the interest rates heading downwards, I think India’s power sector should do extremely well in the next 3-5 years. The need of the hour is not to mix politics with economics. Unnecessarily giving subsidies to people who can comfortably afford power makes no sense to me. I think the state governments should focus on making their electricity boards (SEBs) and power generation & distribution companies more efficient rather than subsidizing our electricity bills.

I think this offer for sale is attractively available at Rs. 315 a share and a 5% discount to this price again leaves a reasonable margin of safety for the retail investors. With the government taking it in the right direction, I expect the stock price to move past Rs. 350 levels very soon and to touch Rs. 500 in the next 15-18 months time.

93 thoughts on “Rural Electrification Corporation (REC) Offer for Sale (OFS) – April 2015 Issue”

  1. By the comments, i somewhat underdtood this ofs. (REC was my 1st). This OFS is very much favour for promoters. I dont private companies also sell the shares through ofs (instead of fpo). If it is so, they can manipulate by making bidding at high prices so that indicative price increases, there by normal people also bid at high price, and on the last minute they cancel their bids.

    Isnt it?

  2. I applied @315 n cud not get allotment. Where i can see the indicative price n can revise my bid (i use kotak securities online).
    So next time it will b useful.

    And y these bloody rascals dont give the option “cut off price”

    For retail investors it seems ofs is very messy.

  3. I just knew that the clearing price (Retail) is Rs.333,30. Is this correct? How such wide gape between indicative price (at 3.30 pm) and clearing price can be explained?

    1. Yes Shubh, Rs. 333.30 is the clearing price for the retail category. This wide gap is due to 9.02 times subscription figure and a large number of bids getting placed below the indicative price. Almost all the small retail investors thought the price to be set between Rs. 315 and 325, so they placed their bids between this price band. Whereas there was enough demand above Rs. 330 levels as well. So, people who placed their bids at higher prices will now get these shares allotted.

      1. The grey market from the IPO/FPO has shifted to OFS. The constant refreshing of demand graphs and repetitive bidding in sync with demand and hedging it by selling futures is beyond most retail investors.

    1. Not sure under which category the application will get processed by the broker and the merchant bankers. If the rules of IPOs/FPOs get followed in this case also, I think he should get 5% discount.

  4. I have applied for 625 shares at 332. This was after I revised my bid up from 320.
    While revising my bid I didn’t realise I might cross the threshold of 2 lacs.

    However if I consider the discount of 5% the price works out to 317 and I dont cross the limit.

    As per rules, will I get the allotment. My understanding is that in retail segments all bids at and above 331.2 will get allotment

  5. no broker is ready to accept that bidding on an ofs day is continue till 3.30pm so my strategy will not work of getting allotment so even idbi capital have not accepted any bid after 2.30pm so what should I do now because I want to apply bid at 3.15pm by checking indicative price of upcoming pfc ofs

      1. Not as good as you. 08-Apr-2015 15:29:38 at 333.35 🙂

        Too bad, did not have enough time for other bids…

  6. There were 1 crore+ bids over rs. 333.3 so i don’t think anyone who bid less than that will get allotment

  7. Indicative Price in the Retail category is Rs. 325.10, higher than the indicative price in the non-retail category. I don’t know whether there is any chance or not for the investors who placed their bids below this price. I think the investors who placed their bids between Rs. 315 and Rs. 320 will not get any allotment for sure. It got subscribed by 9.02 times in the retail category.

  8. I think I’ll miss this offer.. I bid at Rs 323.50. I want to increase it before last 5 mins but my broker said that NSE server is not working!!!!

    Is something like this is possible?? And if yes then who is responsible? Because I missed good opportunity because of someone else..

    1. Hi Nirav,
      Your broker is wrong to say that NSE server was not working. But, I think it was too late for him to modify, cancel or put a fresh order on your behalf. They have order punching pressure in the last few minutes, so they stop accepting fresh orders. I think you cannot hold anybody responsible for this as they are also humans. Rather you should have done it yourself if you have online account.

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