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high ranking official at steelmaker PT Krakatau Steel recalls how the company’s board reacted after State-Owned Enterprises Minister Mustafa Abubakar abruptly decided last month to sell the company’s shares through an initial public offering (IPO) at a lower price than previously expected.

“We were totally shocked by the decision. However, we knew we had no other option than to comply with it since the minister has the last call on the price,” the official said.

“Instead of thinking about what had happened behind the sudden change in share price, we all chose to continue to put all our efforts into making the IPO successful.”

Sold at Rp 850 per share and oversubscribed by nine times the available shares, the price was deemed too low by most analysts, particularly at a time when the capital market was bullish from a huge inflow of foreign funds vying to gain from Indonesia’s undervalued bourse.

Independent consultant PricewaterhouseCoopers, hired to value the stock, priced it at Rp 1,250 per share, including a calculation of future gains from Krakatau’s joint venture with Korea’s steel giant Posco.

It was common practice under previous ministers to use the valuation of the independent consultant in determining the share price, with a rule of the thumb discount between 5 and 10 percent of the price. If that had been applied, the price would have been about Rp 1,000 per share.

Rp 850 per share is also the lowest bracket of the book building range of between Rp 800 and Rp 1,150.

After endorsing the price on Oct. 25, Mustafa tried to revise his decision and called sudden meetings on Oct. 30 and 31 with ministry officials, underwriters and Krakatau management.

Mustafa proposed to raise the price to Rp 950 per share following mounting criticism from capital market analysts and politicians who said the price was too low. He also requested the IPO be cancelled.

The requests were turned down as lawyers for the underwriters and pledged investors suggested a possible lawsuit should the IPO be cancelled or the price was abruptly raised.

“The minister somehow realized the price was too low. He tried to revise it but it was all too late. These incidents indicate negligence on the part of the minister, who has actually caused potential state losses,” deputy chair of the House of Representatives’ Commission XI for financial affairs, Harry Azhar Azis, said.

The IPO’s proceeds of Rp 2.68 trillion (US$299 million) fell short of the Rp 350 billion targeted by Krakatau in its working plan. Most of the proceeds are aimed at financing the company’s joint venture with Posco.

“If there was such high demand for the shares, why didn’t the minister sell them slightly below the recommended ceiling price and let Krakatau obtain optimum revenue from the IPO?” House Commission VI for state companies, trade and industry member Hendrawan Supratikno said.

“Because the logic didn’t add up, we suspect the price was deliberately undervalued so certain well-connected people could take advantage of it,” Hendrawan said.

Their suspicions are also supported by the fact that Krakatau share prices soared by 49.9 percent to Rp 1,270 from its opening price of Rp 850 at the end of its trading day debut at the Indonesia Stock Exchange on Nov. 10.

Politicians and analysts suspected Mustafa’s officials had undervalued Krakatau’s share price so that politicians and well-connected businesspeople near President Susilo Bambang Yudhoyono could buy a majority of the shares and sell them at a hefty profit.

“By selling the shares at a relatively low price, it doesn’t take a genius to see that those who had the privilege of buying Krakatau shares during the IPO would later enjoy a significant amount of capital gains after selling them in the secondary market,” independent stock analyst Yanuar Rizky said.

A source from the ministry, who asked for anonymity, said several politicians forced the underwriters to allocate portions of the cheap shares to them.

“There was a group of politicians, assisted by several ministry officials, that ordered some Rp 1.3 trillion worth of shares through a local securities house. A tycoon had given the politicians the necessary loans to buy the shares,” the source said.

“Because of intense public criticism, most of the orders were later cancelled. Some used other methods to hide their identity in order to buy shares. I believe the orders that can be traced are only worth around Rp 50 billion.”

A source closed to Mustafa said Mustafa was unaware of the tricks his officials, who were close to ruling politicians, played.

Mustafa denied these allegations in a press conference last month. He blamed the IPO underwriters for forcing the low price, an allegation that was vehemently denied by the underwriters who said the minister had the last call in determining the price.

The underwriters are state-owned Mandiri Securities, Danareksa Securities and Bahana Securities.

Mustafa said the low price was aimed at luring “qualified investors” who would retain the shares as long-term investment and would be concerned with the company’s future development.

Share distribution and allocation were the sole authority of the underwriters, he said.