State-owned Coal India's (CIL) mega public float, which hits the Dalal Street on October 18, may cause stress in the money market as investors are expected to borrow heavily to subscribe to the issue, which is expected to garner around Rs 15,000 crore, analysts said.
The largest ever IPO in the history of corporate India will have some temporary stress in the money market as liquidity is likely to shift from general banking system to financing the issue, they said.
Money market experts believe that roughly the total liquidity impact could be about Rs 1.5 lakh crore.
"The liquidity tightness during a large IPO occurs as a result of fact that many bids are financed through borrowing. This leverage shows up as a temporary expansion in the credit during the IPO period," Axis Mutual Fund said in a note.
"The larger the share offer, the larger is the impact on credit and money markets. Thus large IPOs are associated with tight liquidity and rising money market rates," it said.
Two and a half years ago, another large IPO –- Reliance Power -– had also caused some temporary stress in the money market. In India's biggest IPO till date, the Anil Ambani Group company had raised Rs 11,500 crore in January 2008.
Besides, this time, FIIs (and institutions in general) are required to put up cash equal to their bids instead of the previous practice of only 10 per cent of the bid amount.
According to people tracking the primary market, inflows from foreign institutional investors are likely to be around Rs 70,000 crore during CIL IPO.
They said that although about 90 per cent of this inflow would flow back at the end of the IPO period, its implications for forex market and the domestic money market will be big.
It is possible there could be some temporary volatility or strength in the currency during this period.
A money market dealer said that a minor appreciation in Indian rupee due to this heavy inflow cannot be ruled out.
The CIL IPO has seen a broad endorsement from almost all the big as well as small investment banking firms.
Aiming to garner over Rs 15,000 crore through the largest ever public offering in India, the government has fixed the price band of CIL IPO at Rs 225-245 a share. The Centre is divesting its 10 per cent stake in the Navratna company.
The success of the offering would also determine the success of the government's divestment plans for the current year and would contribute to keeping the fiscal deficit within the target for the year.
The world's largest coal producer is expected to commence trading on the domestic bourses by November 4.
"We believe that CIL deserves to trade at a premium to global coal peers given much lower volatility of earnings and large headroom to raise prices in a supply-deficit environment," CLSA said in a note.
CIL is one of the largest companies in the world based on the coal reserves of 64,786 million tonne as on April 2010.
"Coal India IPO would be historic public issue in many metrics. If Commonwealth Games are an answer to China's Olympics, then Coal India IPO may prove to be the answer to Agricultural Bank of China's $20 billion IPO," SMC Global Securities Strategist & Head of Research Jagannadham Thunuguntla said.
According to India Infoline's Head of Research Amar Ambani, with a possible appreciation to $50 billion market capitalisation over time, this company adds to the quality of stock available on Indian bourses. Lower earnings volatility, large undeveloped resource base and the potential to improve realisations warrant a premium to global peers.
