Is something wrong with Sebi’s new auction system?

Are there some design problems with the Securities and Exchange Board of India’s new auction method, which was introduced to help promoters bring down their shareholding to 75%? The first such auction, held for the sale of the central government’s shares in Oil and Gas Natural Corp. Ltd, had to be rescued by another government institution, Life Insurance Corp. of India Ltd, which picked up around 90% of the shares on offer. According to the investment banking community, the government had ignored the advice of its bankers, and fixed the floor price of the issue far too high.

There is no reason to disbelieve that – the issue was strangely priced at a 2% premium to prevailing prices, unlike most block deals that are priced at a slight discount. But no such excuses can be made for the Wipro issue. True, the issuer didn’t make the floor price known, but there’s nothing to lose by bidding at a low rate and finding out eventually that the bid was rejected because it fell below the floor price. Eventually, the floor price was revealed to be at a 3% discount to prevailing market prices.

Perhaps the auction method needs to be tweaked to the markets’ needs or market participants have to still get used to the new system. But placing a bid in an online auction is no rocket science. Market participants place bids every day in the secondary market. And unlike a block deal, where bankers to the issue have to gather bidders practically overnight, managers of the auction have a good day and a half or even more to attract bidders.

Why then, did the block deals of ICICI Bank Ltd, HDFC Ltd and Yes Bank Ltd succeed, while the two auction-based offers meet with a tepid response? According to an investment banker who did not want to be named, the block deals may have been underwritten by the book-runners of the issue. He points to the sale of Temasek’s shares in ICICI Bank in February, about 40% of which was picked up by an arm of Goldman Sachs, who was also the arranger to the issue. Similarly, Citigroup’s Mauritius arm reportedly picked up part of the HDSC stake sale done by Citibank NA. Citigroup was the sole bookrunner for the issue. Another view is that the Mauritius arms are picking up shares on behalf of other clients, perhaps by issuing participatory-notes. Even so, the above-mentioned banker believes it is incorrect to say that there was huge demand for the recent block deals.

The bankers in the Offer For Sale issuances, clearly, haven’t come out with flying colours. Liquidity in the markets is still strong, and while it will be foolhardy to assume that each issuance will sail through, with the right marketing efforts and right pricing strategy, raising Rs 1500 crore shouldn’t have been a tall order.