One of India’s largest follow-on public offers (FPO), by Oil and Natural Gas Corporation (ONGC), has triggered activity in the equity grey market. Stock brokers are paying Rs 3,700 to Rs 4,500 per application to corner retail category shares.
ONGC, the country’s top oil and gas company, is estimated to mop-up around Rs 10,000 crore through its FPO, which opens for subscription on September 20. Since the company is expected to offer a five per cent discount to retail category investors, stock brokers are paying money up-front to applicants who have put in bid of Rs 2,00,000 on their behalf.
The strategy is to sell the ONGC shares in the futures segment at the current market price and buy these at a discount in the FPO. the ONGC stock last traded at Rs 260 on Thursday on BSE. Brokers believe the FPO will be priced between Rs 225 to Rs 250, at a discounted rate for retail investors. The strategy, say sources, will work as retail investors do not want to take any risk in the current market scenario when uncertainty is at its peak. While the risk for small investors is covered, stock brokers are confident of reaping handsome gains.
The government will offer 427 million shares (dilution of five per cent post issue) through this FPO, which will close on September 23. The offer comprises a net offer to the public and a reservation for subscription by eligible employees. If we consider the FPO price at Rs 250 a share, the issue size comes to Rs 10,700 crore. Market capitalisation of the company is Rs 2,21000 crore. Grey market operators have a tested strategy to corner retail category shares. While they got returns in the Coal India IPO, which was highly undervalued, they had burnt their fingers with the Reliance Power IPO. A large number of stockbrokers had offered retail subscribers Rs 2,000-4,000 to on their behalf. During the Reliance Power issue of 2008, they were offered Rs 7,000 for each application. Coal India was listed around Rs 300 against a issue price of Rs 234. Reliance Power IPO, at the peak of the market in 2008, was listed at a 50 per cent discount.