India Should Hold Its Nerve on Stock Auctions

New initiatives don't always succeed first time. The government's auction of 5 percent of Oil and Natural Gas Corp (ONGC.NS), the energy group, could have flopped had it not been for last-minute intervention from state-owned Life Insurance Company of India. But if Delhi learns the right lessons, the auction route could yet be an effective way of selling stakes in state-run firms.

An engineer of Oil and Natural Gas Corp (ONGC) works inside the Kalol oil field in Gujarat.

So what went wrong? Firstly the floor price looks to have been off-putting. On Tuesday the government set the price at 290 rupees, a 2.3 percent premium to the day's closing price. But the price subsequently rose further and then fell back. The moves weren't huge, but were sufficient to sow seeds of doubt in the minds of would-be investors. In the United States, auctions take place outside trading hours. India should consider a similar practice.

It is an advantage of auctions that they can happen quickly, but this process appears to have taken place at precipitous pace. With more time to play with, the government might have been able to bring in retail investors who, unfortunately, were left on the sidelines. The broader the potential investor base, the better the chance of finding buyers - and the better the price-discovery mechanism. Besides, financial inclusion is a laudable aim in itself.

With the economy softening, wider investment market conditions may not have been as auspicious as was anticipated. With practice, however, the vendors and their advisers will become more attuned to these sensitivities, and the pricing imperatives that follow from them.

In the case of ONGC, the government also skimmed over important elements of ground work. For one thing, there is uncertainty about how government policy on oil subsidies will affect the profitability of the company. For another, private sector providers of capital cannot be really sure that New Delhi is committed to privatisation. The state needs the money to ease deficit burdens, yet still wants to call the shots. That hardly helps to make a compelling investment case.

Risk-averse politicians and civil servants are not known for their robust constitutions in the face of a perceived failure. But the ONGC auction encountered significant difficulties, not insurmountable problems.

CONTEXT NEWS

- The Indian government fell just short of its target in a chaotic $2.5 billion auction of shares in Oil and Natural Gas Corp (ONGC). Investors bid for 98 percent of the shares on offer. State-owned Life Insurance Company of India (LIC) is reported to have made a revised bid for 120 million shares just after the markets closed and confusion remains over exactly how many shares LIC bought.

- The floor price for the auction had been set at 290 rupees late on Feb 28, a 2.3 percent premium to the day's closing price.