The government may not use the French auction route for any of its public issues hitting the market in the current financial year.The French auction was tried for two issues - NTPC Ltd and Rural Electrification Corporation - in 2009-10.
The new route, however, got a lukewarm response from investors and the government did not use it for subsequent issues.
In the French auction system, allowed by market regulator Securities and Exchange Board of India in 2009, institutional investors bid for the stock above the floor price, which is normally fixed at a discount to the prevailing market price, whereas retail investors buy shares at the floor price.
"Technically, French auction remains an option because Sebi has allowed it, but we have never used it after NTPC and REC. This route did not find favour with investors, and we may not use it again It is not used in other countries also," said a finance ministry official, who did not wish to be identified.
The official said the feedback from foreign institutional investors was not good, and added another disadvantage of the French auction route was that retail investors received only small discount. Also, retail investors have a feeling they are not getting any discount, since they receive shares at a cut-off price.
In all the public issues so far, the government has given a 5 per cent discount to retail investors. Going by past record, it is likely to
offer the discount in all the upcoming issues this year as well. Retail investors can get the discount in the traditional book-building method.
The government stopped using the French auction route after the NTPC issue could get only 16 per cent retail subscription, followed by REC issue that got 22 per cent retail participation.
Institutional investors also did not show much interest in NTPC as they were not allowed to revise their bids. Finally, state-run investors, State Bank of India and Life Insurance Corporation of India, had to bail out the issue.
Consequently, French auction norms were tweaked a bit after the NTPC issue and institutional investors were allowed to revise their bids downwards in the REC issue. But this also failed to enthuse investors.
The finance ministry is planning to dilute its stake in about 8 public sector units in the current financial year to achieve its disinvestment target of Rs 40,000 crore (Rs. 400 billion).
The process will kick off with disinvestment in Power Finance Corporation in May, followed by stake sale in Oil and Natural Gas Corporation and Steel Authority of India Ltd.
India's largest public sector trading company MMTC, National Buildings Construction Corporation, Rashtriya Ispat Nigam Ltd and Hindustan Copper are the other state-owned companies to hit the market with their issues this year.
The disinvestment department is in the process of identifying a couple of more PSUs where the government can consider divesting its stake.
