The weak response to sale of a 5 per cent stake in state-run Oil and Natural Gas Corporation (ONGC) gives the government little relief as it scrambles to balance the national budget.
ONGC shares slipped on Friday, a day after the sale, and analysts said the lukewarm response will make it more difficult for the government to sell off stakes in other state-run companies, a tactic it had hoped would ease the country's troublesome fiscal deficit .
"Had this issue got a healthy response, the government could have lined up three or four more issues," said Jagannadham Thunuguntla, a strategist at SMC Global Securities. "It is high time the government gets their divestment strategy more organised."
The government had aimed to raise $2.5 billion from selling a 5 per cent stake in ONGC on Thursday.
At the close of trading on Thursday, stock exchanges were reporting that 292.2 million shares - about two-thirds of the offer - had been sold.
India's two main stock exchanges and ONGC then issued a late-night press release, saying that some orders had been wrongly rejected and that final demand was actually for 420.4 million shares against the offer of 427.7 million shares.
Thunuguntla said a surge of interest in the last ten minutes of trading contributed to the confusion.
He said the government had tried to sell ONGC shares at too high a price. The Rs 290 floor price was a 2.3 per cent premium to the previous closing price.
Lack of clarity about what share of India's fuel subsidies are shouldered by ONGC also clouded investor appetite, he said.
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"Everyone expected there to be a discount to the market price," he said. "The government is not in a position to give clarity about subsidy sharing. It would have deserved a bigger discount, of 7 to 8 per cent of market price."
Better priced offers have drawn investor interest. Last week, Citigroup successfully sold its stake in Housing Development Finance Corp (HDFC) for $2 billion, and the $135 million initial public offering of India's Multi Commodities Exchange was 54 times oversubscribed.
The government is scrambling to ease its fiscal deficit before announcing a new Budget on March 16. Faced with disappointing tax collections and a burgeoning subsidy bill, the government had hoped to raise funds by selling stakes in state-run companies, which still dominate large areas of India's economy.
India has raised about $2.8 billion from such asset sales this year, including Thursday's auction, against an initial target of $8 billion, Thunuguntla said.
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Economists are wary of India's growing fiscal deficit, which analysts expect to miss the target of 4.6 per cent of gross domestic product by a percentage point or more.
Some have chided the government for turning to one-off measures like asset sales to plug the gap rather than undertaking more difficult, fundamental reforms to boost revenues and trim spending.
"Sustainable fiscal consolidation should not be based on non-tax revenue," Standard Chartered economist Samiran Chakraborty wrote in a recent research note.
ONGC shares were ended 2.2 per cent lower on the Bombay Stock Exchange on Friday, at Rs 281.45.