What is French auction method adopted by NTPC FPO?
For the first time in the country, the French auction route was adopted for NTPC FPO. Soon after the sober closing of the issue everyone came out in the open lashing this approach. To analyse the limitations of this route we first have to understand what it is all about. Under the French auction method, institutional buyers (qualified institutional buyer in the case of NTPC FPO) would be given a kind of freedom to bid for the stock at a value which they think is appropriate for it. In this method a floor price is fixed and institutional buyers have to bid above that price but there is no upper limit. Now, for example, in case of NTPC any institution can bid for any price above Rs 201 (floor price) and the highest bidder would get preference in the allotment exercise. This exercise is quite handy in generating good value for the stocks because a company can get a higher price as against the book building route in which the upper band is also fixed. That being the reason, after the revised ICDR (Issue of Capital and Disclosure Regulation) guidelines issued by SEBI recently, this route was made available to the government for PSU FPOs.
But why did the NTPC French auction method not work?
Around the globe whenever the French auction route has been adopted the trading in the underlying security has either not existed or if it has then it has been stalled for some time, say a month or so, before the issue. This is due to the reason that French auction is always helpful on price discovery if no concurrent price is available as in the case of any IPO.
On the other hand, in the matter of NTPC’s FPO the secondary market price was always available which restricted investors from bidding for a much higher price than the available market price. So it would have been a different story if trading in the NTPC stock in the secondary market was stalled for at least 15 days before the issue because then investors would have got inquisitive about the stock price. Another lacuna in the French auction route that surfaced during the time of the NTPC FPO was that it didn’t allow institutional investors to revise their bids. However, a lesson has been learned and the government has now given greater flexibility to institutions for the REC FPO so that bids can be revised.
Source: stock market articles
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Nice, clear and concise explanation.
But what about the stalling of trading part in case of new FPOs?? Would SEBI stall current trading of the secondary market stocks of the coming up public offers of public sector companies?