Wipro founder raises $150 million from share sale

A trust run by Azim Premji is able to sell only half the shares on offer, resulting in yet another disappointing outcome for India's new auction sales method.
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Azim Premji, founder of Wipro
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<div style="text-align: left;"> Azim Premji, founder of Wipro </div>

A trust controlled by Wipro’s founding chairman, Azim Premji, was able to raise Rs7.5 billion ($150 million) from the sale of shares in the Indian software company — roughly half of its targeted amount.

The sale, which was completed on Wednesday, was done through the new offer for sale auction method and becomes to second such trade to show disappointing results. The new method was put in place to make it easier for Indian promoters to reduce their shareholdings as it doesn’t require any documentation and also gives the seller a lot of flexibility with regard to the pricing. The only other transaction done this way so far was the government’s sell-down in Oil and National Gas Corp (ONGC) in late February, which met the government’s fund-raising target only after other government entities — mainly insurance company LIC — stepped in and bought the bulk of the offering at a price that was well above the market price at the time.

Part of the reason why the ONGC deal failed was that the government set the floor price at a premium to the market price. This meant that it immediately lost the interest of a huge number of investors, including most foreign investors who had earlier been very keen on the transaction. Clearly they weren’t going to buy shares through an auction if they can pick them up cheaper in the open market.

The Azim Premji trust took a slightly different approach by choosing not to disclose the floor price until the bookbuilding was over. By doing this the seller didn’t have to set the floor price until it had seen how the stock traded the first day after the offering was announced. Hence it didn’t run the risk of the share price adjusting to the floor price and potentially having to sell the shares at a price that was either flat to the market, or even at a premium.

However, the fact that they didn’t know the minimum price seems to have made investors cautious — as they obviously don’t want to pay more than they have to and when the auction closed at 1.30pm India time on Wednesday the valid bids covered only about 70% of the 35 million shares on offer, or a total of 24.75 million shares.

It then emerged that bids for about 7 million shares were below the floor price which was revealed to have been set at Rs418 per shares, which meant the seller could only accept about 17.8 million shares. The floor price represented a 3% discount to the closing price on Tuesday and a 4.5% discount versus the close on Monday, which was when Azim Premji Trust announced the details of the sale. At the floor price, the 35 million shares on offer, which represented about 1.4% of the company, would have raised Rs14.6 billion (about $290 million).

However, Wipro’s share price continued to fall on Wednesday when the auction was taking place and at the end of the session the discount had shrunk to just 1.9% versus the market price. The banks involved in trade passed on some guidance from the seller that the floor price was no higher than Rs421, which resulted in most bids coming in around that level.

There was no official information about the highest and lowest bid prices, but according to a source, the average realised price was Rs421.6 per share.

Aside from the fact that the seller may well have been able to sell an additional 7 million shares if investors had known what the minimum price was, a number of bids were also declared invalid as they weren’t backed by sufficient funds in time. All orders submitted in the offer for sale auctions have to be pre-funded.

However, sources say part of the reason why some bids were showing to lack funding was that the system, yet again, was unable to process all the orders that came in just before the close of the auction in time. When deals are done against a live price investors will typically wait as long as possible to submit their orders so that they can see how the stock is trading in the market. Hence, one can expect most of these offers for sale to receive the bulk of the orders right at the end. The ONGC deal encountered similar issues, and the government even blamed “glitches” at the two stock exchanges for causing the offering to be undersubscribed.

Something clearly has to be done on this front if the new selling method is to take off. The government will have little choice but to use it as it seeks to raise funds to plug the gaping hole in its budget, but promoters of private sector companies are likely to think twice about how to approach their sell-downs after the disappointing outcomes for both ONGC and Wipro.

Perhaps the next move will be for the seller to test the investors’ response if it sets the floor price at a decent discount to the market price and discloses it to the market two days before the sale.

Azim Premji Trust was set up by the Wipro chairman in 2001 with the aim of enhancing the quality of elementary educations at government-run schools, particularly in rural areas. The proceeds from the share sale will go towards the funding of various education projects.

The sale of Wipro shares was arranged by Citi, Credit Suisse, Morgan Stanley and UBS.

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