NTPC would be coming out with a follow on public offer which opens on Wednesday the 3rd of February and closes on Friday the 5th of February. The size of the issue is about 41.227 cr shares and it is an offer for sale by the government of India, which is reducing its holding by 5%.

It is mandatory in the case of an FPO (follow on public offer) that the price of the issue should be announced only one day before the opening of the issue. Accordingly in this case the price would be announced by way of a press release on Monday the 1st of February after close of market hours and would be released by way of an advertisement in the papers on Tuesday the 2nd of February.

There are many new things happening in the capital markets these days. This kicked off with the introduction of Anchor Investors where 30% of the QIB portion is allotted one day before the issue opens.

The FPO issues have been fast-tracked and are being cleared much faster than ever before. Suddenly we also find that after SEBI Chairman Mr Bhave has asked for shortening the allotment process almost all issues opening nowadays are open for only three days which is the minimum period currently mandated.

NTPC will also have the distinction of being the first issue in which the QIB’s would have to bid for shares under the ‘French Auction’. This is a highest bidder highest allotment system where bids are made on a floor price fixed by the issuer of capital. The highest bidder gets his shares first and then the second highest bidder and so on, until the entire quantity offered is allotted. Retail and non institutional investors will be allotted at the floor price which would be announced. Till today FPO’s were sold at or around the market price and at times small discount was offered to retail investors.

Some examples of this are ICICI Bank issue which happened in June 2007 where the price band was fixed in a range of Rs 885-950 and the discovered price was Rs 940. Retail investors were offered a discount of Rs 50 on the discovered price and allotted shares at Rs 890. The market price around this time was Rs 950-960. Another example is of heavy engineering company which came out with a FPO at the same time in a price band of Rs 1020-1090 in June 2007. The market price was around 1150-1160 at that time. The point to be noted here is that the price band is always around the current market price with a downward bias. Trading in the stock continues normally as in any other stock.

This time around there is an expectation that the government wants an aggressive pricing and is looking at fixing the floor price at a premium to the current market price. The closing price on Friday was Rs 222.50 on the BSE. Rumours and speculation indicate that the expectation of the floor price is around Rs 240. There is an expectation that the issue will be mopped up by Banks, financial institutions, Japanese Investors and Pension funds amongst others simply because this is a very strong utility play where the performance will improve and profitability and profits increase as the generating capacity increases. If in this issue it is like all other issues where the floor price is fixed at or around the market price there would not be any need to suspend the price, because markets will price themselves accordingly.

One must also remember that this is not a fresh issue but only an offer of sale therefore there will not be any dilution of equity and as a result no fundamental change will happen. The liquidity will improve; the floating stock will improve and probably as the free-float improves the weightage of the stock in the benchmark indices will become greater going forward.

There is talk about suspending trading in the scrip of NTPC after the price band/floor price is announced and continue the same till the issue closes. This means that trading would be suspended from Tuesday the 2nd of February till Friday the 5th of February. Assuming this happens the same would be unprecedented and would be without any parallel in India or abroad. Why should an investor who is small or big be debarred from an opportunity to buy or sell a share simply because the company is having an FPO? Secondly this would amount to an unfair practice as suspending of trading is done in very grave or serious conditions and nothing of that sort has happened here. Thirdly this would set a bad precedent and would have to be followed in subsequent issues and we have a large number of government divestments to happen.

The markets have fallen very sharply over the last few days and in all probability will fall on Monday as well on overseas cues. There is likely to be a bounce back sometime during the week thereafter. Suppose an investor buys NTPC shares and wants to cash out, why should he be debarred or prohibited from doing the same. Secondly after the issue floor price is announced there will be volatile movements depending on the price and also based on the bids from QIB’s. Why should the entire process be vitiated by having an abnormal condition of suspension of the scrip’s trading? By suspending trading, there would be an unnatural move which could impact the markets and the indices when trading resumes after 4 days. Why should there be any such suspension unnecessarily?  There should be normal trading and in the interests of the capital markets no suspension should be there. Going forward this if done would have to be the norm and it will certainly be very damaging.

I believe something like this if done would cause irreparable damage to the transparent systems that India is proud of. Even the idea of having a price band or floor price which is higher than the current market price seems unrealistic simply because the retail and non-institutional investors who form 50% of the issue would never subscribe at a premium. In such a case it would mean that the entire issue would have to be bought or subscribed by institutional investors.

I believe the answers to these questions are just not there at this point of time and we would have to wait till Monday the 1st of February to have the same resolved.