Why the French could not save NTPC’s FPO

With an eye on better valuations, NTPC adopted the ‘French Auction’ model for its follow-on public offer. The lukewarm response to the issue is prompting a rethink on this mechanism

In a first for an Indian company, state-run power utility NTPC Ltd took recourse to the ‘French Auction’ route for selling the institutional portion of its follow-on public offer (FPO). The rationale was to garner higher valuations through better price realisations. However, expectations have turned out to be largely misplaced, with the issue taking a beating. The government is now rethinking whether the French Auction model is appropriate.

Under the French Auction method, the highest bidders get a priority on allotment. As such, qualified institutional buyers (QIBs) were expected to jump onto the bandwagon, since they get preference on the price bids they place for the shares. However, the government failed to take cognisance of some preconditions essential for the success of any issue based on this model.

For a French Auction to work its magic, two conditions have to be satisfied—first, a robust demand should exist for the shares, where potential buyers are willing to fight it out for getting more allocation. This is where the Google IPO (which adopted the Dutch action rout) worked wonders. Second, there should not be a reference market price (as is the case in an IPO). If such a price exists, then the offer should be substantially lower than the prevailing price, so as to attract buyers’ attention. Both these conditions were conspicuously missing from the NTPC issue. At Rs201, the floor price of the issue was not low enough to offer any significant upside in terms of the prevailing market price of Rs205. Not only was there no element of mystery as regards the price (being a follow-on public offer), but more relevant was the complete apathy towards the issue, especially from retail and foreign investors.

Under conventional book-building, even if you bid high and if the book gets built at the middle of the price band, you will still get the discovered price. But in case of a French Auction, the fund manager is stuck with the higher price—and the higher allocation as per the model.

Next on the government’s divestment agenda are Rural Electrification Corporation (REC) and NMDC, where it is likely to replicate the French Auction model for the institutional portion of the public offers. Unfortunately, many of the issues that weighed upon NTPC’s offer feature prominently in these offers as well. Unless market conditions and investor sentiments improve dramatically, these public offers may go the NTPC way.
 

  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    Anil

    1 decade ago

    Hi expected article i read similar article on investmentguruindia.com

    Shibaji Dash

    1 decade ago

    Climb down from the ' commanding heights' to feel the foamy froth that the market price is, remove the froth to fix the floor price , dust off the books to recall Keynes that in the long run we are all dead. The native intelligence looks for short term. The retailer cares not much that long term gains are tax exempt. The merchant bankers help fix the price for the 3rd generation to gain from the grandpa's investment in the IPOs/FPOs of 2010. Phew!

    R Balakrishnan

    1 decade ago

    Today, the lead managers etc must have 'managed' the NTPC price. Otherwise, in today's market, there is no way the scrip traded above Rs.200/-. So, rigging is not just restricted to private sector shares.

    Rahul

    1 decade ago

    Please research your facts, google ipo was dutch auction .. not french ..

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    28 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 4 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)