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Saturday, January 31, 2015

Did Coal India’s share divestment trigger the stock market fall on Friday?

Before an answer to the question can be attempted, let us look at some facts and figures.

The government had offerred to divest 5% of its equity holding at a ‘floor price’ of Rs 358, with a 5% ‘greenshoe’ option. What that means in plain English is that in case of an oversubscription, the government would part with a total of 10% of its equity holding.

As per reports, there was an oversubscription. That also means the offer price may be a little higher than the floor price.

The total amount likely to be realised from the share divestment is a huge Rs 24000 Crores – which is more than 50% higher than the amount realised from Coal India’s IPO back in Oct ‘10.

FIIs put in bids worth a reported Rs 5400 Crores. That is about the size of their net investment in equities in an average month. Since FIIs were net sellers of equity yesterday, it is fair to conclude that some of them booked profits in the secondary market to invest in Coal India’s offer.

That leaves a balance of more than Rs 18000 Crores, which must have been invested by DIIs and individual investors. DIIs were also net sellers of equity on Friday. Some of them must also have booked profits in the secondary market to finance their investment in Coal India’s offer.

So, the obvious answer to the question is a qualified ‘Yes’. Why qualified?

Because stock markets don’t fall on facts alone. They also fall on expectations of future events. As per a recent article in Business Standard, in the pipeline are divestments from ONGC worth Rs 15000 Crores, and HDFC Bank worth Rs 10000 Crores. Both offers are going to receive enthusiastic support from investors of all hues. There are smaller offers from PFC (Rs 1900 Crores) and REC (Rs 1600 Crores) that are awaiting government’s nod.

To top it all, a few PSU banks came out with disappointing Q3 results. Since the stock market was at a lifetime high after a 10 day rally that pushed technical indicators into their overbought zones, the stage was ideally set for a correction.

Putting matters into perspective, Sensex and Nifty corrected by about 2% from their lifetime highs touched yesterday, and closed marginally lower for the week. Some more correction may be on the cards till the overhang of share divestments is dissipated. The dip can be used to add to fundamentally strong stocks in your portfolios.

That was the long answer. The short answer is: Yes.


hitesh garg said...

the analyst is mentioning that the fall is due to ofs of cil, he is not telling that this level of indices is false nd mainted from 6 jan.2015 to f&o expiry, which now in feb. they with all their horses cannot maintain, indices will come to the level as per worth, nd now up to march they[bulls] will not show their strentgh untill new expectations of final year results date , nd above all flow of fii will also decide their policy.thankyou.

hitesh garg said...

stock market charts are in very dangerous zone, nd fall will happen minimum 600 points in nifty nd upto 15th feb from this level nd after tht may gain 300 point recovery no more up to 22 march.

Subhankar said...

Appreciate your comments, Hitesh.

You got the first part of your 'prediction' almost correct - the correction from the Jan 30 Nifty top to the Feb 10 low was more than 500 points. But the index subsequently recovered its entire fall.

Also, index levels are never 'false'. They are what they are - even if our analysis suggests otherwise.