Mumbai: India’s capital market regulator may tweak the so-called French auction norms to ensure better retail participation in forthcoming share sales.
Two persons familiar with the development said that under the proposed norms, the bidding process for institutional investors will be opened first; then, based on the cut-off price for such buyers, the price for retail investors will be fixed.
The Securities and Exchange Board of India, or Sebi, is studying the proposal and may announce the new norms in the first quarter of the next fiscal that begins in April.
Under current French auction norms, introduced by Sebi in October, in a follow-on public offering (FPO) of shares, retail investors buy shares at the floor price, which is typically fixed at a discount to the prevailing market price of the stock on offer. Institutional bidders are required to bid at any price above the floor price.
Once the new norms are in place, the discount for retail investors will be based on the minimum price at which the shares are allotted to the institutional investors in the first stage. This will offer a better price discovery mechanism to the retail investors.
Investment bankers say this could make the discount on offer to retail investors more “stable”. Under current norms, retail investors are offered a discount on the prevailing market price and this shrinks if the share price falls between the time the pricing is announced and the issue opens. This has been the case for all FPOs of public sector undertakings this year; consequently, retail investors have stayed away from most such offerings.
“The proposed norms may ensure greater retail participation for issues that follow the French auction route,” said one of the persons familiar with the development. Both people did not want to be identified.
The French auction route is not mandatory for all FPOs. Such share sales can also follow the traditional book building route. In a book building method, a 20% price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after close of the bidding. Bids are collected during the issue period at various prices within the price band. The final issue price is determined based on the price that receives maximum investor support.
Jagannadham Thunuguntla of SMC Capitals Ltd, a Delhi-based brokerage, said the move to amend norms is being considered by the primary markets advisory committee of Sebi not only for FPOs, but for all public issues. “Ultimately, the institutional investors are value deciders. High networth individuals and retail investors are value followers. That’s why you see retail investors waiting till the last day to see the institutions’ response before taking investment calls.”
The proposed norm, according to him, will remove ambiguity as retail investors will have a clear idea of how institutional investors respond to a share sale.
“The move will also help cleaning out the small issues. Low-quality issues will get weeded out at the institutional level and the retail investor will be protected from the risk,” he added.
A tweaking in the pricing norms for retail investors in FPOs is critical as a number of big-ticket FPOs of state-owned firms are slated to hit the market next fiscal. The government has said it will raise Rs40,000 crore during the year by selling some part of its stake in some state-owned firms.
According to Bsepsu.com, a Bombay Stock Exchange website dedicated to share sales by state-owned firms, Steel Authority of India Ltd, Hindustan Petroleum Corp. Ltd, Bharat Petroleum Corp. Ltd, National Aluminium Co. Ltd and Power Grid Corp. of India Ltd are set to hit the market.
An investment banker, handling the initial public offer of Satluj Jal Vidyut Nigam Ltd, and who did not want to be identified said: “Sebi had informally asked for suggestions to improve the French auction process. There was a general feeling that the process is inherently weak and certain tweaking will help.”
French auction norms failed to enthuse retail investors in some recent public issues. NTPC Ltd and Rural Electrification Corp. Ltd (REC) were the first two companies to adopt this route for their FPOs. The NTPC issue barely managed 16% retail subscription. On 1 February, the discount for retail investors in NTPC was fixed at 5% to the market price, but when the issue opened on 3 February, the discount had narrowed to 2%.
The institutional investors too did not evince much interest for NTPC as they were not allowed to revise their bids downwards.
In the absence of private domestic foreign institutional investors, the government had to step in and the issue was solely driven by two state-owned institutional investors, State Bank of India and Life Insurance Corp. of India.
The failure of NTPC’s public issue forced the disinvestment ministry to rework French auction norms and offer greater discount for retail investors. In the REC issue, institutional bidders were allowed to revise their bids downwards and this helped the cause of the share sale.
The discount for retail buyers in REC, which was fixed at 8% to the market price on announcement, shrank to nearly 5% when the issue opened. The REC issue too failed to attract retail buyers, and gathered merely 25% subscription.