Investors’ attitude towards shares’ auction process – learning from recent auctions

- Rajib Dahal

The stock market NEPSE is on a short term bullish mode and it has brought good news to many. Many major indicators such as the number of investors, number of transactions, and transaction amount are all on an upward trend. Though the country may have been suffering from the COVID-19 pandemic, investors, many of them, have learned how to embrace digital technology in trading, and the remaining have also learned to trade while coping with this deadly pandemic. In that sense, everyone deserves a pat on their back.

This article looks at one particular aspect of the market and the scope of this article that I have chosen is a very narrow one. In the context of three Non-life insurance companies recently completing their auctions of rights shares in the market, I have tried to analyze the price behaviors, investor’s sentiments, and possible lessons for investors for future auctioning. Let’s now delve into the real issue.

Three major non-life insurance Companies Prudential Insurance Company Limited, NLG Insurance Company Limited, and Shikhar Insurance Company Limited have completed the auctioning of unsold rights shares and some of them have already been listed on the NEPSE. These companies have auctioned both the General/Ordinary Shares and Promoter Shares but we will look more closely at General/Ordinary Shares only.

Let’s look at some of the fundamentals of these three Companies before we analyze the price discovery.

Also, some indicators relating to share price movement and auction price:

Table – 2 above makes pretty much clear to keen observers about investors’ perception of risk, their optimism in the market, and the investor's ability to find gap or potential in appreciation of stock price in the future. The regular readers of Sharesansar must have gone through a previous article published on this portal here: https://www.sharesansar.com/newsdetail/how-much-to-bid-in-prudential-nlg-and-shikhar-insurance-auction-share-get-an-idea

The article sought to provide guidance to potential participants on the auction process on how they can discover the right price while taking part in an auction of general shares of PICL, SICL, and NLG. By looking at the historical data from previous auctioning, the article suggested that in average, the shares came out to be 12.84% cheaper than their Last Market Price on the bourse. Therefore, the analysis stated that the investors looking to grab shares of PICL, SICL and NLG could possibly bid at approximately at a value 13% less than the LTP of the bid closing date. That was a very fair prediction based on historical data.

However, the Cut off Price that has been announced for PICL, NLG, and SICL  has forced us to look further in the price discovery mechanism and; investor’s risk aversion as well as confidence that they have on the companies and stock markets. This is where my Table -2 throws some light.

First of all, congratulations to the investors and traders who took the risk to go to the Bank and to the Merchant Bankers (Issue managers) to fill the physical application as there is no online mechanism yet to apply electronically for auctioned shares. Due to the COVID-19 pandemic, investors could have asked for additional compensation for taking this risk. However, they did not seem to be in that mood. Investors seemed to be in a competitive mode to grab all that they can. The result was that investors made their bidding in the range of 3.61% - 6.80% less than LTP of that stock on the previous day. This percentage of difference in price is derived by considering the LTP of the stock one day prior to the auction closing date and cut off price. The investors saw that they could still book profits by bidding that high, or they found the stock worth so high that they were willing to put all their money on these stocks.

Another important aspect of the bidding price was that investors were positive towards the future gains these stocks would bring, and were positive in general towards the market’s growth. The Comparison of the absolute value of share prices – cut off-price and LTP from the date of allotment – shows that NLG and PICL have already surged substantially (11.03% - NLG and 12.03% for PICL). Even SICL’s surge is positive (4.34%) though disappointingly low as compared to the other two scrips.

On the light of these 3 auctions, how the prediction for future changes? If we include the results of recent auctions in the data table that we already have, we have now historical data of 19 companies who completed auctions of unsubscribed shares in the past. First of all, the data size of 19 is very small to derive any inference with proper statistical significance, and any predictions based on it less likely to provide proper guidance. Secondly, it tells us that historically, investors put their bidding price, on average, 11.56% (vs. 12.84% from 16 companies’ data) less than the LTP of auction closing date. If we take the median, it comes somewhat close to 8.64% (vs. 8.69% from 16 companies’ data). Therefore, to understand the investor’s willingness to bid at a higher value, we need to consider additional market factors. These additional market factors which affect Investor’s behavior will be discussed in more detail in my next article. Just to outline them here, they are: rising stock indicators (NEPSE index at 1462.48 on 27 July and 1458.04 on 27 August – both representing fairly bullish sentiment), increased investors’ awareness, their ability to identify the higher probability of gains in certain stocks, the performance of the overall sector/sub-sector, strong fundamentals of the Company (Net Profit ratio, EPS and Per Share Net worth, etc.). In conclusion: Ceteris paribus, Investors will be going for a cut-throat competition in the future to grab stocks of good performing companies, and that is going to push down gains that could ordinarily be booked earlier. Things are going to get more competitive and in the process, stocks appear more expensive for ordinary investors.

The views in this article are personal views of the author and do not represent views of the organization or entity he is associated with. The author is engaged in trading in Nepal’s stock markets and is a researcher on behavioral finance. He holds a Master of Science (finance) with an executive certificate on Investment from Cass Business School, London, and Masters in Corporate Laws (LLM) from India.