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| I-bankers defend French auction, blame volatility for NTPC setback |
| BS Reporter / Mumbai Feb 16, 2010, 00:28 IST |
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The auction process followed for the follow-on public issue (FPO) of NTPC, the public sector utility major, is being criticised for leaving too little on the table for small investors. However, investment bankers said it was market volatility that played spoilsport with NTPC’s offer, where the French auction process was first used. The issue got a tepid response from retail investors.
Under the system, a floor price is announced for qualified institutional buyers (QIBs), who can bid for any number of shares above the floor price. A QIB has to give the number of shares and the price at which it wants to bid. The allotment begins from the entity that has put the highest bid. This means entities with the highest bids are assured allotment. Meanwhile, retail investors and high net worth individuals do not participate in price discovery.
“A French auction leads to maximisation of price realisation,” said Falguni Nayar, managing director, Kotak Mahindra Capital, while announcing the FPO of Rural Electrification Corporation (REC). The REC issue will also use the auction process. Kotak Mahindra was among the lead managers for the NTPC issue, whose retail portion was undersubscribed. The FPO’s floor price was Rs 201. The shares are trading around Rs 205 in the secondary market.
“How many times a book is subscribed shouldn't be considered as a significant signal,” said Nayar, adding there were “challenges of a volatile market” and that a French auction “will attract investors who genuinely want to own the company”.
Nayar is not alone in defending the system. Madhabi Puri Buch, managing director and chief executive, ICICI Securities, said the system was introduced when the market was volatile. “There are two things that happened simultaneously... What should be rightly attributed to the market shouldn't be attributed to the process,” she said. On the specific issue of NTPC, she said it “has nothing to do with the process... It was on account of market circumstances”. ICICI Securities was also one of the lead managers for the NTPC issue.
Meanwhile, REC’s FPO will hit the market on Friday. The issue, of 171.7 million shares, comprises fresh issue of 128.8 million shares and an offer for sale of 42.9 million shares. The price will be announced on Friday.
P Uma Shankar, managing director, REC, when asked about the lacklustre performance of the NTPC FPO, said “This issue is different from that of NTPC... Here, three-fourths of the proceeds will come to the company.”
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