french auction method

For the first time in the country, the French auction route was adopted for NTPC FPO. Soon after the sober closing of the issue everyone came out in the open lashing this approach. To analyse the limitations of this route we first have to understand what it is all about. Under the French auction method, institutional buyers (qualified institutional buyer in the case of NTPC FPO) would be given a kind of freedom to bid for the stock at a value which they think is appropriate for it. In this method a floor price is fixed and institutional buyers have to bid above that price but there is no upper limit. Now, for example, in case of NTPC any institution can bid for any price above Rs 201 (floor price) and the highest bidder would get preference in the allotment exercise. This exercise is quite handy in generating good value for the stocks because a company can get a higher price as against the book building route in which the upper band is also fixed. That being the reason, after the revised ICDR (Issue of Capital and Disclosure Regulation) guidelinesssued by SEBI recently, this route was made available to the government for PSU FPOs.