Till the erstwhile Hughes Software made a Book-Building IPO in the second half of the 1990’s, IPOs in India always had a fixed price. Thereafter, the process shifted to a book-building IPO whose discovered price led to a fixed price offering for retail investors.

Finally, the fixed portion was done away with and pure book-building IPOs ruled the roost. Though not specifically so tagged, these IPOs primarily used the methodology of the Dutch auction route, whereby all allotments were made at a single discovered price.

This route is also referred to as open descending price auction, as in this auction the bids may come in at the higher end of the band and then as the auction progresses, a higher quantum of lower bids could lead to a lower discovered price.

In the global IPO space, Google’s IPO was undertaken using the Dutch Auction process.
 
In India, the state-owned power producer NTPC’s  FPO has just opened for subscription. In what marks a change in policy, its FPO is being made using not, the now traditional quasi-Dutch auction route, but the French Auction model. Rightly, this is only for the institutional portion of the proposed share sale.

Under this model, institutional investors can bid above the floor price and the allotment would be on a price priority basis. This mechanism will enable NTPC to get a better price for its shares and maximize its proceeds from the FPO. This process is based on the principle ‘Higher the Bid, higher the Allocation’.

Hence, only if two investors bid for the offer at the same price and for the same quantity of shares, only then will their allotment be proportionate.

Notably though, in case of already listed companies (FPOs) the allotment is to be capped at 15% to any institutional investor as it would otherwise trigger the SEBI Take-over Code norms.

The Government has already announced its intention to conduct the FPOs of REC and NMDC too using the French auction process, though the IPO of Sutlej Jal Vayu Nigam is likely to mark a return to the traditional Dutch auction type book-building process.

Is this a progressive step ? Seems so, but time will tell. From a retail investors perspective the proof of the pudding always lies in its eating.

Hence, amidst a turbulent secondary market, retail investors who participate in the NTPC FPO will be keeping their fingers crossed that a healthy price discovery by the institutional investors through the FPO route will ensure enough of a price differential with the base price they are allotted shares at.

If that differential remains, then the French Auction route could well  displace the hitherto used quasi-Dutch Auction route as the preferred route to adopt while issuing IPOs and FPOs in India.