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Faced with a daunting task of achieving the disinvestment target of near Rs 40,000 crore in less than six months, the Centre may bring back the “French auction” pricing model for share sales to institutional investors.
“We are debating about the re-introduction of French auction in Government disinvestment process. If pursued, a Cabinet approval is required (for changing disinvestment procedures),” a Disinvestment Department official said.
The French auction, which was allowed by SEBI in November 2009, is an additional book building mechanism in which the bidders would be free to bid at any price above the floor price. Allotment would be on price-priority basis and at different prices. This French auction pricing model is used only for institutional investors.
Simply put, different institutional investors will get different amounts of shares at different prices. The Government last tried the French auction route for NTPC transaction in early 2010. Prior to that, the French auction method was used for the Maruti transaction.
India currently follows the Dutch auction system for the book building process. The price discovery is done within a price band decided by the issuer, in consultation with the merchant bankers.
The French auction, which is often considered as a winner's curse, is a win-win situation for investors as well as issuers. This multiple-price auction could ensure higher price realisation for the issuer. An investor who is more bullish will tend to bid at a price that is different and therefore has a chance to get higher allotments.
“Higher the bid, higher the allocation basis,” a capital market observer said, referring to the French auction model.
Meanwhile, the Finance Minister, Mr Pranab Mukherjee, remained non-committal on whether the Government would be able to achieve the divestment target this fiscal. So far, the Government has mopped up about Rs 1,400 crore as disinvestment receipts.
“Let us see. It is too early to make a commitment about the final number,” he said.
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