The French models, which are famous for setting the fashion trends all over the world,from wine to cosmetics,had literally, failed to rock on the Indian ramps if the response to the follow-on public offers (FPOs) of the two state-owned behemoth, the National Thermal Power Corporation (NTPC) and the Rural Electrification Corporation (REC), are anything to go by. NTPC and REC are the first two share offerings from the government stable as part of its fresh disinvestment initiative and is expected to rake in Rs 25,000 crore to Rs 30,000 crore.
While NTPC had hit the market with the issue of 4,12,27,73,220 equity shares of Rs 10 each at a floor price of Rs 201, REC had hit the streets with the offer for sale of 17,17,32,000 ordinary shares at a face value of Rs 10 each with a floor price of Rs 203 for retail and non-institutional category. In both the issues, the underwriters and lead managers had not fixed the upper price band-as in the case of normal book-building route – for the qualified institutional buyers (QIBs) who could bid at any price above the floor price.
The Centre, which was embroiled in polemics and endless litigations in the past over the method of disinvestments in PSUs, this time, had opted for alternate book building method, better known as French auction method, to steer any controversy.
According to market sources, the ?French auction model? might have virtually turned a waterloo for NTPC FPO unless the cash-flushed domestic financial institutions and banks wide opened their purse strings while the other major players watched the show from the sidelines without cheering the issue till the last ball was played. While the NTPC FPO had managed to scrape through, the REC issue got a paltry response from investors cutting across the board on its debut.
According to fund managers, the French auction method used in NTPC FPO refers to a uniform-price auction model used by fixing a lower price band or reserve price. After the issue closes the company fixes a minimum and maximum price bands in consultation with the market regulator. Any bid above the maximum price is eliminated as a thumb rule. And the players who bid between the minimum and maximum prices are awarded shares on a pro-rata basis, they said.
In the case of REC, the French auction route has been tweaked a little by giving some head room for QIBs to revise their price bids either way depending on the prevailing market condition, they added.
?This (French auction method) is a new concept to the investing public and there were lots of reservations on the part of QIBs as well. This is the major reason for the lukewarm response to these issues,? said a senior official of one of the book runners for REC.
?The issue may see initial resistance from institutions, but towards the close, it would mop up the required bids as the big fishes are watching for others to bid first and set a trend,? said another merchant banker dealing with the issue, adding ?this time, the brokers are also mollified by increasing the commission amount for selling the issue.?
“The government is likely to follow the book-building method in the forthcoming PSU FPOs and IPOs. For instance the Union Bank of India, in which the Centre has decided to dilute 15.8% stake via IPO, slated to hit the market on February 23, has adopted book-building procedure by fixing a lower price band of Rs 60 per share and an upper band of Rs 66 per share.
The NTPC FPO was oversubscribed by 1.20 times, the share of which was picked up by domestic institutions and the public sector banks. The government has sold 5% stake in NTPC via this FPO. The REC, issue which opened on Friday cut a sorry figure on day one with the FPO getting 0.51 times bids from QIBs, 0.19 times from non-institutional investors (NIIs) and negligible response from retail and employee categories. REC is trading flat at Rs 214 levels on NSE as of the closing of trade on Friday. As of December last, the President of India was holding 81.82% stake in the PSU.