Ringside view. Lessons from IRCTC IPO: Time to explore green-shoe option?

So, did the Indian Railway Catering and Tourism Corporation (IRCTC) price its IPO too conservatively? If one goes by the response, it suggests so.

Against the government target of raising ₹645 crore, the public issue has received bids for ₹72,000 crore! The issue got subscribed 112 times, as all categories of investors, including the usually conservative category of employees, had bet their money overwhelmingly.

Yes agreed, given IRCTC’s strong fundamentals, the pricing of the issue could have been a bit more aggressive.

As the issue price is determined based on the bids received from investors, the after market price often tends to rule significantly higher when there is a case of underpricing.

However, even a more ambitious price of say ₹400 a share (instead of the current ₹320) by IRCTC would not have made much of a difference to the Centre from a fund-raising perspective, given that it has set the disinvestment target at ₹1-lakh crore for the current fiscal.

Besides, if the stock gains sharply post listing, the Centre has the option to dilute its stake further through the offer-for-sale mechanism in the secondary market at a much higher price. By keeping the primary market vibrant and positive, the government can push through other candidates quite easily.

However, one option that the government could have explored would have been a green-shoe option on the IPO, which allows the issuer to sell more shares than the initial target in case of oversubscription.

A green-shoe option in IPOs was introduced by the Securities and Exchange Board of India in 2003 mainly to stabilise the after-market prices of shares. During those days, some operators used the primary market to make quick bucks by artificially inflating the demand for public issues. So, to reassure and safeguard investors, especially retail investors, and provide them an exit route, SEBI had introduced the green-shoe option window period of 30 days after the listing of shares.

The process involves the appointment of a merchant banker as a price stabilising agent. The banker should enter into an agreement with the promoters (or other pre-issue shareholders in the case of OFS) to ‘borrow’ a maximum of 15 per cent shares from them, which they will use to provide stability to the stock price post listing.

Call auction

However, the introduction of the call auction mechanism has since changed the whole game. The regulator, exchanges, promoters and merchant bankers have felt the call auction is a better price discovery mechanism to gauge the demand for IPO shares.

Given the current environment in the market where identifying fundamentally strong companies is not easy, it is time to take a relook at the green-shoe option for IPOs more closely.

For issuers, exercising the green-shoe option would help them raise funds at one go.

This route will also help the promoters to meet the mandatory minimum public shareholding norm of 25 per cent well within the SEBI-stipulated time-frame, after their initial listing.

The issuer company also benefits from this mechanism, as enhanced investor confidence will result in more bids from investors at better prices.

Investor-friendly move

From the investors’ angle, a green-shoe option increases the opportunity to own the shares of fundamentally strong companies at a fair price. Besides, post listing, the stock price may also show more stability.

A fresh issue of shares in the IPO will not only help the government prune its stake but also the PSU company to raise funds, which can be deployed to fund future expansion and other strategic opportunities.

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