In an interesting move, Citi increased the price of the shares it sold in India’s Housing Development Finance Corp (HDFC) on Monday night by two rupees per share. The price increase was communicated to investors after the books closed.
As reported on our website yesterday, Citi sold 16.5 million shares, representing 1.4% of the existing share capital, to bring its stake in the mortgage lender below 10% ahead of the implementation of new Basel III guidelines. The price was fixed towards the top end of the Rs625 to Rs644 offering range at Rs641 per share, for a total deal size of Rs10.58 billion ($236.5 million) and a discount of 2.4% to the latest close.
However, when the shares were crossed on the stock exchange before opening yesterday morning, the price had change to Rs643.
According to a source, the higher price came about in an attempt to prevent losing a bunch of shares to investors who hadn’t actually participated in the block trade the previous night, but had got wind of the final price and thought it attractive enough for them to boost their exposure. This can happen, and frequently does, on Indian block trades since the cross done by the bookrunner isn’t protected. Anyone who puts in a bid at the exact price at which the bookrunner is selling the block can get allocated stock through automatic matching and there have been cases in the past when the bookrunner has lost as much as 45% of the stock to investors who weren’t supposed to get them, leaving less shares to allocate to the investors who should get them.
When Citi, which was both the seller and the sole bookrunner of the HDFC block, discovered that there were orders for a large chunk of shares — some say as many as 10 million — at the placement price of Rs641 put into the auction yesterday morning, it had a quick discussion internally and decided that the buyers would probably be ok with paying two rupees more if it meant they got to keep more of their shares.
And hence, it raised the price to Rs643 per share. It could do so because it had enough demand across the price range to cover the deal, but according to the source, it only lost one of the original buyers — and even that was supposedly not because it wasn’t willing to pay more, but because the person who needed to confirm the higher price wasn’t available at the time. And investors said they were happy as they were able to get a decent chunk of shares — the block accounted for approximately 10 days worth of trading volume — at a still reasonable discount.
Yesterday’s share price movement supported that view. HDFC did fall as low as the placement price at one point in the afternoon, but finished the day at Rs648, which is just 1.4% below the previous close and 0.7% above the revised placement price.
Citi still lost about 5% of the stock at the higher price, but in the context of other Indian block trades, that is quite minimal.
The outcome is that Citi, as the seller, raised Rs10.61 billion ($237.2 million) from the sale, compared to the initial $236.5 million, while investors received their shares at a slightly tighter discount of 2.1%.
It is unlikely that similar tactics can be used systematically to prevent share losses in the future, but perhaps Citi’s move can convince the Indian stock exchanges to take another look at how blocks are crossed in the opening auction.