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The ONGC Maha Auction, Maha Failure!

Published on Mon, Mar 12,2012 | 14:54, Updated at Mon, Mar 12 at 18:09Source : CNBC-TV18 |   Watch Video :

On March 1st, the government in a disinvestment move launched India’s first OFS or offer for sale- an auction of sorts. 5% of its stake in ONGC was on offer. It’s been 7 days since the ONGC auction fell flat on its face. Or at least it would have if LIC had not stepped in to buy 90% of the shares on offer. It’s been 7 days since many of LIC’s bids were rejected due to insufficient funds. It’s been 7 days since the Exchanges and SEBI accepted LIC’s bid orders even though the markets had closed. It’s been 7 days since the government, its bankers, stock exchanges and the regulator made a mockery of how India’s capital markets work. And yet we have no explanation forthcoming on why? What went wrong?

So Sajeet Manghat made many calls, asked many questions and troubled many sources to put together this behind-the-scenes account of what went wrong on Thursday, march 1st between 2.00 and 3.30pm!

Jaipal Reddy, Oil Minister Bite On Feb 28th, 2012
“The ONGC stake sale through the auction route (will take place) in couple of days. Notices will be sent to stock exchanges tonight.”

36 hours later. Thursday March 1st – 2.45pm in the afternoon - brokers across the country were staring at their screens in disbelief.

The ONGC auction had been open 5 hours and bids had come in for just 16.6 lakh of the 42.77 crore ‘government owned’ shares on offer.

Was India’s first offer-for-sale about to fail? Where was LIC- the expected lifesaver of this auction?

The Firm Asks
Why did LIC’s bids come in late? Why hadn’t it placed its bids yet?

LIC offered no comment but the department of disinvestment did!

Sidhartha Pradhan
Additional secretary, Department of Disinvestment
”That could be one point of view from LIC point of view there could be large investors who would be waiting till the last moment so that they can grab maximum amount of shares because once they punch in there is a possibility of leakage of price you have to understand that this is a price priority issue so anybody who punches the last price or high price winner takes all.”

LIC had, it seems, decided to bid for 40 crore ONGC shares through 8 brokers- 2 of them selling brokers, that is bankers to the issue as well. The bids were to be distributed over 25 orders at staggered prices.

Sometime around 3 pm that day LIC’s brokers got to work, punching in the orders and opting for custodian funding. The custodian, Stock Holding Corporation of India, had been instructed in advance by LIC- that was a crucial requirement as the auction required 100% upfront margin or funding and the custodian had to ensure that the full bid amount was transferred to the stock exchange account before the order was punched in or else the order would be rejected. In a regular trade, the custodian has up to 11am the next day but on Thursday, time was of essence, every single second.

A little after 3pm the bid number on the BSE website started climbing- from 16 lakhs to 1.43 crore shares. And then it suddenly reversed! Unbeknownst to the market - orders by 4 of LIC's brokers had been rejected due to insufficient funds.

The Firm Asks
Did LIC’s bid money come in late?

Sidhartha Pradhan
Additional secretary, Department of Disinvestment
”I am told LIC came in at 1:44 pm on the 1st. I repeat 1:44 pm and that was still about two hours. The money was there; I believe LIC had transferred about Rs 14000 crores to the Stock Holding Corporation account. I am surprised the money was there and LIC what they bought was much less. In fact, they were refunded about Rs 5000 crores. The money was there; they had to match only- don’t know what happened. Why Stock Holding Corporation did not match the money which was lying the in the account with the bids which were being punched by the brokers.”

Minutes before the auction closed, LIC’s brokers were confronted with several rejected bids. The trades were punched in again but by the time they were confirmed by the custodian…it was too late – the auction and the markets had closed!

Sources in the SHCIL say the custodian understood 100% upfront margin to mean the funds should be in the exchange account before 3.30pm, which they were. Hence there was no case for the bids being rejected before the auction closed. But investment bankers don’t buy the logic.

The Firm Asks
Who is to blame- SHCIL or stock exchanges? So was SHCIL to blame for misunderstanding the auction rules or did the exchanges goof?

Sidhartha Pradhan
Additional secretary, Department of Disinvestment
“No exchange should have rejected the bids at 3:15pm or 3:20pm because the bids were open till 3:30pm. I mean they could have in the meantime checked with the custodian before rejecting offhand - there lies the crux. If your bids are open till 3:30pm, you could have waited till 5 minutes; checked in pool, go to the custodian and see whether the money is there or not but off hand if you reject- that led to chaos after chaos and that is what SEBI has found fault.

Chaos it was because by then the designated stock exchange - BSE had stopped updating the bid data.

Now as per SEBI regulations, the designated stock exchange has to disclose bid quality at regular intervals. BSE and NSE decided to update the book every half hour till 3pm and thereafter every 10 minutes till the auction closed as the last half hour is when most institutional investor bids are expected to come in.

By around 3.20pm, the bid number had climbed back to 1.43 crore shares and then it froze there. Since only LIC and its brokers knew about the rejected bids, investors thought the auction had collapsed! …Until the BSE spoke up putting the bid number at about 9 crore. Then the NSE confirmed that it had received bids for 19.92 crore shares.

That meant LIC’s bids for about 28 crore shares had been confirmed amounting to a total offer subscription of over 70%. LIC had saved the day but nobody knew that in the last crucial minutes of the auction.

The Firm Asks
Did wrong bid data discourage bidders?  So did BSE make matters worse by freezing the bid data? Would more investors have jumped in, in the last few minutes, if they knew others were buying especially since this auction was on a price priority basis?

V Jayashankar
Sr ED & Head ECM, Kotak Investment Banking
“The current auction regulation which has been released by SEBI only talks about demand; it doesn’t talk about disclosure about demand and price. So once you make that change even the stock exchanges will figure out the necessary changes in the software so that the public comes to know about both the demand and the price. So I think this discussion has to first happen with the regulator- which is both SEBI as well as the exchanges- so that if all three are in agreement we can have a complete disclosure and then it completely mirrors the secondary market.”

It was only by late Thursday night that the final bid numbers were disclosed. And surprise surprise the auction was declared a success - with 98.3% of the book covered at a discovered price of Rs 303.67 per share. But how was that possible if bids for 12 crore of LIC’s 40 crore share purchase had been rejected?

Well this time, it was SEBI to the rescue! The market regulator 'legitimised' LIC’s orders transactions even though they came in after the auction and markets had closed.

The Firm Asks
Why did SEBI legitimize late bids? Would SEBI have accepted late bids had the government not been involved?  Would SEBI have legitimized the bids if the auction had been fully subscribed? Has SEBI set a bad precedent?

Sandeep Parekh
Founder, FinSec, Law Advisors
Former ED, SEBI
“Just imagine a bid enters the normal market which are not confirmed through the correct process would the market be open several minutes after my failed bid has been put in the system the clear answer is no. it sends a bad signal in terms of that the government is above the law. What they should have done was they should have let this fail and come up with another auction process after some days when they were ready with bidding with all the money early in the morning with the custodian ready for it.”

V Jayashankar
Sr ED & Head ECM, Kotak Investment Banking
“At the end of the day, SEBI is the final authority on these matters. They have gone through the details and have therefore found that the money has come in and the trade is in fact correct; then SEBI is right in getting all this demand uploaded.”

Technical errors aside, this auction’s biggest failure was its inability to generate demand for ONGC shares!

This, even though in February, the MCX IPO was oversubscribed 54 times receiving Rs 35,000 crore rupees in subscriptions. The same month, Citi sold nearly 10% stake in HDFC for worth over Rs 9000 crore rather successfully but at a 6% discount to market 

And though the government denies having forced LIC to participate in the ONGC auction, had the life insurer not stepped in, only 2 crore shares of the 42.7 crore on offer would have sold.

The Firm Asks
Did government over-price ONGC offer? Its bankers had recommended 260 rupees a share, but by setting the floor price at Rs 290, did the government over-price the offer?

Sidhartha Pradhan
Additional secretary, Department of Disinvestment
“For us, ONGC is an under- valued company. ONGC is being valued at $7 per barrel whereas the peer group is valued at $13-15 dollars and for that you said that ONGC is overpriced but I am telling, ONGC may be under priced- I mean it is the perception so we had kept the floor price at Rs 290 and besides LIC, many others have come in; many foreigners have come in who have given a right price to back the shares.

Who those foreigners are is not known?  As for the price – the discovered price of Rs 303.67 a share is about 20 bucks more than ONGC’s market price before the auction was announced.

The Firm Asks
Was LIC looted? Yes, the government got a premium, but LIC picked up the bill?

Sandeep Parekh
Founder, FinSec, Law Advisors
Former ED, SEBI
“So typically, issuers listen to bankers- the only exception is the government and they choose not to even look at media reports. I understand that the bankers consistently said that this is not going to work. As I said it makes no logical sense for anybody to sell shares above market price. The only way you can do is by way of a prior agreement. Since it’s an auction process, that’s not possible; you have to give a chance to everybody. Having said that, if you do try to kind of violate logic, reason, economics and your bankers advice, you do it at your own risks.”

The next issue is one we have empathically made before - an OFS is a non-prospectus based offer and that many believe makes marketing it non-permissible.

The Firm Asks
“Did auction fail due to no marketing? Could the lack of marketing be one reason why the government got pricing and demand so wrong?”

Sidhartha Pradhan
Additional secretary, Department of Disinvestment
“Please understand, SEBI’s regulation does not permit any marketing, any advertising. So it is for SEBI to consider what’s best and how best to market it because the sebi guidelines categorically state that you cannot market, you cannot advertise, you cannot go on the TV- then what do we do now. Probably SEBI will look into that and get back how to better market it and what type of advisors to be kept.”

V Jayashankar
Sr ED & Head ECM, Kotak Investment Banking
“I don’t think there is a particular need to market OFS and I say this because every company discloses its financial results every quarter and at the end of each quarter, they also hold a investor conference, Apart from that, most companies have calendars fixed during the course of the year where they meet investors in India as well overseas. In that sense, there is regular flow of information every quarter from all the companies and when you have this level of flow of information, I don’t think it’s really necessary to do any special marketing to access the demand.”

The events of March 1st have raised several questions regarding the bullying behavior of the government and the submissiveness of LIC and SEBI

The Firm Asks
As for the failed auction - is the OFS method bad or did the DoD and its bankers manage it badly?

Sidhartha Pradhan
Additional secretary, Department of Disinvestment

“We will have only one designated stock exchange not two- that is for certain. There was lot of confusion, there was virtually no co-ordination between the two stock exchanges and number two we will request, who ever puts in the largest bid or aggressive bid, they should choose their custodian very carefully. Here the LIC custodian has not come out well.”

Sandeep Parekh
Founder, FinSec, Law Advisors
Former ED, SEBI
“I think the bigger picture was not the technical glitch. As far as exchanges go, there have been no technical glitches. I think the real issue is that nobody wanted to buy the shares which are available in the same market for a lower price. So you would have to be either kind of out of your mind or you have to be told by the government to purchase shares. Clearly nobody else wanted to buy those shares and therefore the government kind of twisted LIC’s arm to make them purchase their shares above market price.”

V Jayashankar
Sr ED & Head ECM, Kotak Investment Banking
“Allow the price to be announced to the stock exchange one hour before the stock exchange open on the day of the trade. So if the trades are happening on Wednesday and the market opens at 9:15am, allow the floor price to be announced at 8:15am. Number 2 - provide complete transparency on both the demand and the price through the entire session of the auction so that investors can make up their mind. Number 3 - if we can re look at the margin issue to a level which is far below 100%- some what mirroring normal trades on the stock exchange.”

Sajeet has asked 9 important questions in this story and last night at 2 am, he mailed me some more data that gives rise to even more questions. The government got Rs 12,765 crore from this auction. Of that, LIC paid Rs 11,069 crores for 37.71 crore ONGC shares at an average price of RS 293.45. But LIC had bid for 40 crore shares- so what happened to the remaining 2.29 crore shares – were they rejected, withdrawn… what?

One more question – the data indicates that the remaining 4.33 crore shares sold by the government sold at an average price of Rs 391.8 a- wow! That’s a hundred bucks more than the floor price- who paid so high a price? Was it another State-owned buyer or is there genuine demand for ONGC shares. Well looks like we will run out time but not out of questions!

We put one last one to SEBI Chairman UK Sinha at the IBA M&A Conference on what has SEBI learnt from the ONGC OFS

UK Sinha
Chairman, SEBI
“It is too early to say what SEBI has learnt or what the whole market has learnt. But SEBI’s position is if there are any learnings from them, we will look at them seriously. As of now, there is nothing that I can say in specific terms.”

 
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