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.

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    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.


    1 decade ago

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

    Network18 lays off 350 more employees

    Increasing competition and loss-making revenue models have been forcing Network18 to go in for cost-cutting measures, including laying off employees. At the same time, the media company has been pumping money into its cash-strapped, loss-making businesses

    Media and entertainment company Network18 Media and Investments Ltd, which has been pumping money into its cash-strapped, loss-making businesses to keep them alive, is finally taking a call on the situation. According to sources, the media company has laid off about 350 employees, mostly technical and production employees from its Web operations. It (the layoff) also includes some journalists, the majority of whom have now joined Zee Business.

    According to a source, who wishes to remain anonymous, the company has not offered any increment this year. Even its Web-based commodities operations employees have not received any increment since the last one-and-a-half years, the source added. Network18 has also reportedly closed its technical analysis beat from the Web operations of moneycontrol.com and wants to outsource the same to cut costs.

    In November too, Network18 laid off around 200 permanent employees as part of a restructuring exercise aimed at merging broadcast operations of its Hindi and English business news channels. According to a filing by the company to the Bombay Stock Exchange, the 'one time' restructuring cost it Rs4.50 crore on account of rationalising the workforce.

    During the quarter to end-December, Network18 reported a consolidated loss of Rs21.30 crore from Rs44 crore, as total revenues increased to Rs370 crore from Rs222.76 crore, a year ago. It also swung into positive earnings before interest, tax, depreciation and amortisation (EBITDA) with Rs8.11 crore from a loss of Rs38.90 crore in the same period last year. Network18's operating profit margin remained poor at just 2%.

    In a release, Raghav Bahl, managing director, Network18, said, “We are holding on to cash, equivalents and liquid investments in excess of Rs1,000 crore across group companies. If revenue growth momentum continues as projected, we hope to enter a strong profitability and cash generation phase in the next few quarters."

    During the third quarter of FY10, Network18 also received cash infusion from Nokia and GS Home Shopping into its Web business. Nokia Growth Partners, an investment fund owned by Finnish mobile handset maker Nokia Oyj, has invested $10 million (Rs48 crore) in Web18 Holdings. Similarly, South Korea’s GS Home Shopping, the world’s third-largest home shopping network, has invested $18.50 million in HomeShop18, a Network18 subsidiary.

    These investments have given Network18 a 'comfortable' position. "Both the Web and HomeShop businesses have welcomed strategic capital (from Nokia and GS Home Shopping) in Q3, putting both operations in a comfortable cash position to aggressively scale up their ambitions," Mr Bahl said in a release.

    At the same time, the media company has been pumping money into its cash-strapped, loss-making businesses, to keep them alive. Unfortunately, several group companies and subsidiaries of Network18 are so heavily weighed down by losses, that their net-worth has been completely eroded. Belying their glitzy public images and continuing expansions, they are essentially sick companies.

    The revenue model of media companies, especially those with a bouquet of TV channels, has always been under tremendous stress. Obscene salaries, lavish overheads and large dollops of equity options made these companies among the most expensive operations in India relative to their revenues. Quarter after quarter, we have marvelled at the ability of TV channels to survive the deluge of red ink that would have drowned companies in any other sector.

    The launch of ET Now, a business news TV channel, by the deep-pocketed Times group has created more pressures for peers like CNBC TV18, NDTV Profit and Zee Business. With its 'complete package' for advertisers, including a business daily and TV channel, the Times group is snatching away a major chunk of ads from other media companies.

    Moneylife had reported about this earlier (see here). The properties and titles of Network18 are spread across print, Web and television (news, business, general entertainment and music) and almost all of them are making losses. Last month, Network18 had to rescue its sister concern, Infomedia, the publishing unit of its group company TV18, by infusing liquidity through inter-corporate deposits of Rs58.50 crore. Network18 had also supported Infomedia when its rights issue failed in January.

    Incidentally, Network18 has been busy launching and acquiring several new businesses with funding mostly through public money and later from bank finances. Virtually nothing has been funded through internal accruals, raising doubts about the inherent viability of the businesses.

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    1 decade ago

    good reasons to invest in neywork 18
    fixed deopsit

    R Balakrishnan

    1 decade ago

    If the co is cash rich, should they be offering 12% p.a. on unsecured fixed deposits from public? And wonder why they need this fixed deposit at all. Is the cash flowing?????

    Results of steps on price rise will be visible soon: PM

    The prime minister has told a party meeting that necessary steps have been taken in consultation with chief ministers and the results would be visible in the next few weeks

    The results of the steps taken to control price rise would be visible within the next few weeks, prime minister Manmohan Singh said on Friday, reports PTI.

    Dr Singh gave this assurance at the Congress Working Committee (CWC) meeting in New Delhi which deliberated on the issue of rising prices, according to party leader Mani Shankar Aiyar.

    The PM told the meeting that necessary steps have been taken in consultation with chief ministers and the results would be visible in the next few weeks.

    Chief ministers of Congress-ruled states gave a presentation on steps taken to control price rise.

    "We have been asked to take steps to control rising prices and check hoarding and black marketing," Assam chief minister Tarun Gogoi said.

    The issue of Telangana also came up in the meeting with home minister P Chidambaram stating that the terms of reference of the Srikrishna Committee would be finalised soon.

    The issue of 'Mumbai for all' also came up with some leaders being critical of the stand taken by the Shiv Sena and the Maharashtra Navnirman Sena (MNS). Rahul Gandhi was not present as he was away on a tour of Maharashtra. The state’s chief minister Ashok Chavan was among those absent as he was in Mumbai with Mr Gandhi.

    This is the first meeting of the CWC in the New Year amidst increasing criticism of the Union government's alleged failure to control prices.

    Today's meeting came a day before the conference of chief ministers convened by the prime minister on price rise and at a time when consultations are on for the Union budget to be presented later this month.

    The price rise in recent months has led to a veiled attack on agriculture minister Sharad Pawar, with Congress leaders saying that not enough was being done on this front by the Nationalist Congress Party (NCP) leader.

    Congress president Sonia Gandhi in a letter to party workers had recently said that the issue of price rise was one of the highest concerns and she had taken up the issue with the prime minister.

    The previous CWC meeting on price rise was held in August last year in the wake of the drought situation and rise in prices of essential commodities. The meeting had asked the party and government to observe austerity measures.

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