Last week we closed the giant follow-on public offer for ICICI Bank. This week we will see another from BEML. Generally, follow-on offers have seen lukewarm response from retail investors and super-rich punters.
Follow-on offers end up being entirely institutional products. Big institutions, private equity players and mutual funds, which cannot get enough of the stock from the secondary market, certainly not without high impact costs, have little option but to bid heavily and bite off large chunks of these issues. But retail investors just do not find them attractive enough.
For a start, follow-on offers do not have the lure of an undiscovered market price. In an initial public offering the promoter could price the issue conservatively and the price discovered on listing could be far higher. That is what excites the individual investor--to bet on a good business whose value has not been fully discounted by the market.
In a follow-on offer, there is no mystery, therefore a smaller window of opportunity. Doubly so, when the offer price is very close to the prevailing market price. An average investor can buy any quantity of the stock from the secondary market; it is not worth his while to take a 2-3 week market risk and bet on a minor 4-5 per cent potential stock arbitrage. By the time his stock comes in, the opportunity may have closed out.
Companies need to rethink their capital raising strategy. The good old rights issue seems so much more attractive for retail investors. Rights generally get priced at a substantial discount to the prevailing price, which makes it worthwhile. For companies that do not want to do a rights issue, there is institutional placement.
If your follow-on offer is anyway going to be subscribed by institutions, might as well do it directly to them through an institutional placement, unless there is a shareholding structure issue. For smaller companies, even a private placement is a more elegant and simple way of raising capital. If the objective of the company, however, is to expand its retail investor base then the pricing needs to be much more conservative. Companies have to leave more on the table for retail investors to make it worth their while, else follow-on offers do not make sense.
(The writer is Executive Editor, CNBC-TV 18)