French Auction: Government Fails To Learn Lessons From NTPC FPO !


Failure is the stepping stone to success – Probably, the theory does not work so well for the Indian Government. They have yet again decided to move forward with Rural Electrification Corporation (REC) Follow-on Public Offering (FPO) through the much debated French Auction methodology which proved to be a big failure in the case of FPO of yet another state owned company NTPC.


French Auction: The Indian Way

The government has fixed the floor price of Rural Electrification Corporation FPO at Rs.203 per share, which is at 7.8% discount to Wednesday’s closing price of Rs.220.15 per share. Under this offering, the government will divest 5% stake whereas 15% will be issued as fresh equity by the company. The issue will be open on February 19 and close on February 23.

The government has decided to follow the French Auction route for this FPO, which did not meet enough favor from investors during recent NTPC FPO, with minor tweaking in the methodology this time around, by giving institutional bidders the scope to revise their bid-both in terms of price and quantity.

Huge Pipeline of Expectation

With fiscal deficit at record highs of 6.8% of GDP plus off-budget subsidy burden, the government has a significantly big agenda at hand regarding disinvestment in various public sector companies in the years to come. With such a huge public offering pipeline, the government just can not afford to lose trust and faith of investors by pricing its issues high and with illogical methodologies.


While the current lot of offerings is only a miniscule part of the disinvestment plans executed till now, government needs to maintain its reputation as an able promoter of various companies with sound logics and firm footing in terms of its public offering perspective. The next in line of follow-up public offering from state owned group of companies is mining major National Mining Development Corporation (NMDC).

Do you feel Government will be maintain its reputation amongst investors as an able promoter as it moves forward to shore-up funds through disinvestment route?

  1. Viral says

    Ok… Madhav, Now i got what u meant to tell, as to why is govt. not selling higher stake in REC rather than just 5%. Well, that is the decision/discretion of the govt. as to how much stake it wants to divest in a particular company depending upon the yearly targets set for each of the PSU jewels.

    Thanks for your clarification.

    1. Madhav Shivpuri says

      Yeah, the fuzzy neurons in my brain finally unjumbled! Thanks for the replies.

  2. Viral says

    Dear Madhav,

    Thanks for rephrasing your query for better clarity.

    A public offer (IPO or FPO) in a PSU can be brought on by either of the two or even both at tandem- the company itself via issuance of fresh equity and/or by the President of India which is the major promoter of Indian PSU companies.

    In the above instance of REC FPO, government is divesting its stake in the company to the extent of 5%, whereas 15% is in the way of fresh issuance by the company. Thus, serving the purpose of funding requirements of both the entities seperately. While stake sale by the Government would amount to divestment thus helping the country bring down its fiscal deficit to that extent or use the said funds for social sector spending; the fresh issuance by REC would lead to fulfilment of the company’s own requirement through funding of its business purposes.

    Thus the offering in case of REC is a blended offering from both the Government and the fresh issuance from the company itself. That said, fresh issuance of shares by the company would lead to dilution of the shareholder’s equity to that extent and even bring down the over-all government’s stake in the company due on account of dilution, over and above the stake sale by government.

    I hope I have addressed your query. If you have any more query, please feel free to ask it without any issues, i would be glad to solve it to the best of my knowledge.

    1. Madhav Shivpuri says

      Hi Viral,

      Thanks for explaining that, which is in line with my thinking. The question still in my mind is, why the Govt. does not dilute 20% in REC rather than do 5% dilution + 15% FPO?

      Regardless of the above, answering your question of whether the Govt. was managing the dilution effectively through underpricing the FPO, since the prices of PSU’s have already run up 5-10% since the dilution was announced, this could be a correction to the intrinsic value. If however, the Govt. is selling below intrinsic value then the existing shareholder’s are losing value.

  3. Viral says

    Dear Madhav,

    Fistly, thanks for the positive response.

    Secondly, your query is a bit unclear as to- ‘what is the purpose of FPO, if the govt. wants to and can generate cash through its stake dilution as planned.’

    Can you elaborate as to what explanation are you asking for specifically. I would be glad to reply you with more clarity.

    Regards Viral

    1. Madhav Shivpuri says

      Viral, let me rephrase. Are FPO and stake dilution by the Govt. in PSU’s one and the same thing? If so, that explains it.

  4. Madhav Shivpuri says

    Hi Viral,

    First of all…nice post and look forward similar stuff in the future.

    What is the purpose of FPO, if the Govt. wants to and can generate cash through its stake dilution as planned? Can you provide some background?

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