Power Finance Corporation Offer for Sale (PFC OFS) – July 2015

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 skukreja@investitude.co.in

What seemed to be an easy task for the Finance Minister Arun Jaitley at the start of the current financial year is getting more and more difficult now and if the government is not able to get the land bill passed and the GST introduced with effect from its much anticipated date of April 1, 2016, the task will become next to impossible to achieve. I am talking about the government’s target of raising Rs. 41,000 crore through disinvestment of minority stakes in Central Public Sector Enterprises (CPSEs) and Rs. 28,500 crore by selling its controlling stakes.

Investors were carrying high hopes that one way or the other, the Modi government will be able to do something to get the land bill passed and the GST bill introduced in the Monsoon session of parliament. But, with the first four consecutive days of the current session getting washed out, it doesn’t seem that the Modi government wants to use its muscle power to overcome the current logjam created by the opposition.

But, the government is still trying to do whatever little it could to bridge the gap of where it stands right now and where it wants to reach. This time the idea is to sell its 5% stake in Power Finance Corporation (PFC) and the method of selling this stake will be the same which was used to sell the 5% stake in REC i.e. Offer for Sale (OFS) on the stock exchanges.

Power Finance Corporation (PFC) is also one of its Navratnas, like Rural Electrification Corporation (REC) and both the companies are in the similar lines of businesses i.e. power financing business.

The government will be selling its 5% stake in the company i.e. 6,60,02,035 shares at Rs. 254 a share as the floor price. With 5% discount for the retail investors, the government will be able to raise a minimum of Rs. 1,660 crore from this share sale. Currently, the government holds about 72.8% stake in the company, which will come down to 67.8% 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 reduce its 72.8% stake in PFC to 67.8%, thus cutting its holding in the company by 5%. A total of 6,60,02,035 shares will be sold by the government in this offer for sale, out of which 20% shares i.e. 1,32,00,407 shares will be reserved for the retail investors investing up to Rs. 2 lakh.

Offer Price – Yesterday, when the markets got closed for trading, the share price of PFC closed at Rs. 259.55 on both the stock exchanges i.e. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The government has set Rs. 254 as the floor price for this OFS, a discount of 2.14% to its closing market price.

5% Discount for the Retail Investors – The government has once again decided to offer a discount of 5% to the retail investors. This discount will be offered on the price at which the retail investors successfully 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. 255, the retail investors will get it at Rs. 242.25 a share plus applicable brokerage charges and statutory taxes thereon. So, the retail investors should consider these charges in their overall cost of acquisition.

Cut-Off Option Introduced – This would be the biggest highlight of this OFS. Long demanded by the retail investors, SEBI recently made it mandatory for the companies to provide the option to place their bids at the “CUT-OFF” price.

As observed during the OFS of Rural Electrification Corporation (REC), OFS process is still very complicated for the retail investors. They just cannot keep changing their bid prices in order to increase their chances of successfully getting these shares allotted. They still require either proper guidance or the option to bid at the cut-off price. So, this time around, their demand has been fulfilled. Now, they will not be required to change their bids as the indicative price goes up or down. But, it would be interesting to observe how the shares would get allotted among the successful retail bidders.

Only a Single Day OFS – As always happen in an OFS, PFC 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 Monday evening itself and if successful, you’ll get the shares allotted by the designated stock exchange on T+1 basis.

As the bidding gets started on the stock exchanges at 9:15 a.m. on July 27, you can check the LIVE bidding status here on the National Stock Exchange (NSE) as well as on the Bombay Stock Exchange (BSE).

How does an OFS process work? – Offer for Sale Process

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 your bid placed through telephonic confirmation.

Should you invest in this OFS?

This is what I had to say during the 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.

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.”

What I mentioned in my REC OFS review, I stick to it and feel there is a huge potential in India’s power sector. However, there are a couple of macroeconomic concerns. Firstly, China is slowing down considerably and secondly, India’s corporate profitability is also not showing any sign of a turnaround with some key reforms pending due to parliamentary hiccups.

Though I feel the Indian economy and stock markets would do extremely good from a medium to long-term perspective, stock prices would be very volatile in the next couple of months. If the markets go down further from here, I think PFC stock would also fall equally sharply.

Assuming the government to fix its allotment price for the retail investors at Rs. 241.30 per share, the stock is available at approximately 5X its estimated earnings per share (EPS) and 1X its estimated book value (BV) for the current financial year. The company has also managed to generate return on equity (RoE) of 21%. I think this offer for sale is attractively available at Rs. 254 a share and a 5% discount to this price makes it more attractive.

28 thoughts on “Power Finance Corporation Offer for Sale (PFC OFS) – July 2015”

  1. I got my amount credited back…that means no allotment of the shares 🙁
    I had placed the bid with telephonic confirmation at 12:30 pm yesterday.

    1. That is good because today’s market price is lower than allotment price even after factoring in retail discount.

        1. You are right Shiv. What I meant is, in this instance, it worked well for Ketan. Even my application got fully refunded (though I did tick cut-off price and got eIPO confirmation from HDFC so not sure what happened), so I am happy 🙂

    2. Nobody got the shares allotted at the “Cut-Off” price. So, it seems the Cut-Off price is of no use. This time around, even the Indicative Price was not there for the retail category which made it more difficult for the retail investors. The government will have to find out a new way of retail allotment, otherwise they will incur losses in most of these OFS.

      1. Hi Shiv,

        Thanks for the wonderful write-ups.

        Can you please answer where we usually can get indicative price for an ongoing OFS?


        1. Thanks Sudheer,
          Indicative Price for the retail category used to be there in earlier OFS issues. Now, the ‘Cut-Off’ price option has been introduced and PFC OFS issue was the first issue with this option. With Cut-Off price option, indicative price does not get disclosed.

      2. Thanks for your articles. I have two questions:
        1) How do you know that no-one among retail got shares allotted at cut-off price?
        2) At what prices did retail got allotment in this case?

  2. Clearing Price for the retail category is Rs. 261.90 and for the non-retail category is Rs. 254.10. It seems it would be a difficult exercise for the government to allot shares to investors at the Cut-Off price.

  3. What happens if an investor bids at the (default) floor price of 254, indicates the cut-off option, and then cut-off price is decided at 260. Will he
    a) get all shares applied for at the cut-off price of 260 or
    b) his offer rejected and refunded or
    c) he will get proportionate number of shared allotted by him (dividing the total amount of his bid by the cut-off price)?

    1. Hi SB,
      If you are checking the “Cut-Off” box, then it does not allow you to place your bids at Rs. 254. With cut-ff box checked, you need to enter only the quantity.

  4. PFC OFS has been subscribed to the tune of 4.49 times in the retail investors category and 1.80 times in the non-retail investors category. Cut-Off price will be announced in the evening today by the government.

  5. For retail investor, the investment limit is Rs 200,000. My question is if i want to bid at cut off price, how do i compute the no. of shares to be applied for so as i am within the Rs 200,000.

    Can i use floor price to compute the 200,000 limit. what would happen if the final cut off price is too high and my application becomes bigger than 200,000

    1. That’s a good question Abhishek. As there is no clarity on this as of now, I think the investors should place their bids to a maximum of Rs. 1.80-1.90 lakh so that there is no disappointment of not getting 5% discount if the cut-off price is set on a higher side.

  6. if cutoff price is 258.55, then all 400 shares will be given to him in retail category at 258.55-5%discount (add brokerage to this)

    1. Hi Naveen,
      If the bid price is Rs. 260 and the Cut-Off price option is not selected, then the bidder will get it allotted at Rs. 260 and not the cut-off price of Rs. 258.55.

  7. Thanks a lot for the information . I have a query. If retail applies share at cut-off price then he will get shares in proportion to the demand. Let us presume the cut- off price for PFC will be Rs 258.55 in retail category. Now if someone in retail category applied for 400 shares at 260 then I presume he will get all the shares ie 400 shares at 260 less 5% discount. People who apply at cut off will not get all shares applied by him/ her . Correct me if I am wrong

    1. Thanks Prakash,
      Your understanding is correct. A person bidding at Rs. 260, with cut-off price at Rs. 258.55, will get all the shares he/she places bid for. However, due to high bid prices and no upper limit price, the cut-off price will be set on a higher side in such OFS.

  8. Thanks Shiv for a well organized ,detailed article and especially for throwing light on the fact that the cut-off option is introduced. I have a question that’s been on the top of my mind and would much appreciate if you share your thoughts on the same. All the recent Ofs that came up (Coal India , REC) and PFC are available in the secondary market . I understand that the previous offers were fully-subscribed. What is the incentive for non-retail investors to lap it up in a OFS rather than buy it in the secondary market. Also is there any other incentive for the retail investor apart from the (5% discount – brokerage) to buy it via OFS rather than secondary market.

    1. Thanks Ziran,
      I think non-retail investors try to cash it on the arbitrage opportunity in such OFS. They sell it in the secondary markets and bid for it in the OFS. For retail investors, it is majorly the 5% discount which makes them bid for it. It is also the correction in the stock price of the company which takes place as the OFS plan gets announced which the investors try to cash in.

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