Open Auction May Decide IPO Price

An auction-based method for pricing of initial public offers may replace book-building, with the government aiming to bring in more transparency and efficiency in share sale.

Market regulator SEBI’s primary market advisory committee (PMAC), which has been asked to prepare a paper on various price discovery mechanisms, is examining the issue. While no final decision has been taken, it is possible that SEBI might opt for a method similar to the Dutch auction process used in the Google initial share offer.

The government had discussed the proposal with SEBI after which the panel was entrusted with the task. According to one model being considered by the committee, qualified institutional buyers will be told to bid for shares in an open auction. The lowest bid will then become the fixed price for retail investors.

Generally, in an open auction, investors are asked to indicate the price and number of shares they wish to buy. The issuer then allocates certain shares in a descending order of prices till the amount of shares to be issued is exhausted. The lowest bid price is accepted as the deemed price and all investors pay this price. In case of oversubscription, allocation is done on a pro-rata basis.

Consider a situation where a company wants to sell one million shares. The underwriters rank the demand for shares in descending order of prices till one million shares are reached. If the total demand is for two million shares, then the highest price bids adding up to one million shares is considered. The lowest price becomes the price at which shares will be allocated.

“In an auction method, the issuer gets the right value for shares, institutional investors get shares at a price they want and retail investors can then buy it at the lowest price offered by a qualified institutional buyer,” Prithvi Haldea of Prime Database said.

Open auction has become the preferred way to discover the price in Japan and France, among other countries. In the US, the concept was pioneered by venture capitalist Bill Hambrecht and was used in the Google IPO, although the concept is yet to gain popularity in that country.

The government’s move to look at alternatives to book-building method for price discovery comes against the backdrop of an increase in pre-IPO share placements. In last few years, most companies hitting the capital market have opted for a private placement just ahead of the IPO. In most such deals, while institutional investors managed to bag shares at a lower price, retail investors, who bought shares through the IPO, had to pay a higher price.

Reliance Power Public Issue Soon

Anil Ambani group firm Reliance Energy today announced its subsidiary Reliance Power will soon go public, a move that is presumed to help it raise up to three billion dollars (about Rs 12,000 crore) through the IPO.

Reliance Power is expected to file next week its draft prospectus for the IPO, which is aimed at part-financing its about Rs 100,000 investment plan for setting up coal, gas and hydro power projects in the country. If successful, the public offer could value the company at over 20 billion dollars.

The decision for an IPO was taken at the Board meeting of Reliance Energy headed by Ambani, whose group as such has a market capitalisation of over Rs 200,000 crore.

"The Board approved a proposal by Reliance Power, a company promoted by Reliance Energy and Reliance ADAG, to undertake an IPO of equity shares. The DRHP for the IPO will be filed by RPL with SEBI shortly," REL said in a statement.

RPL is pursuing various gas, coal and hydro power generation projects in different parts of the country. The proposed IPO is being undertaken to fund the development of the said projects, the statement said.

Reliance Power To Hit IPO Stands

With markets on a roll Anil Ambani has made quite a killing not just for himself but for investors as well. Now he is planning a new Initial Public Offering (IPO) for his power subsidiary and as expected it is going to be in billions. Reliance Energy plans to increase its capacity to 25,000 MW over the next 5-7 years. To fulfill its ambition the company is now seeking helping an hand from Dalal Street. According to sources Reliance Energy is planning an IPO for its subsidiary Reliance Power. The company plans to file DRHP of Reliance Power soon and is planning to raise $2.5-3 billion. It has also appointed Enam, JM Financial, JPMorgan, Kotak and UBS as merchant bankers.

Reliance Power has been asked by the government to hand over Sasan project within the next four years. The estimated cost for Sasan project is seen at Rs 20,000 crore. The buck does not stop here, the company has also lined up some mega investment plans. Reliance Power is planning to invest Rs 40,000 crore in ultra mega power projects. It is actively considering to-bid for 4,000 MW Krishnapatnam project also. Reliance Energy stock has gained 148 per cent in the last one year outperforming the benchmark indices by a wide margin. Brokerages after the sharp run-up have turned cautious. However many believe there is huge potential of value unlocking within the stock if the management decides to hive off EPC business into separate entity.

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