Could the chatter over Royal Mail's pricing prove right?

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Vince Cable ought to know that his 'froth' line will look very silly if the shares shoot to a big premium over the flotation price

Ignore the froth, advises business secretary Vince Cable. Well, OK, that's often a sensible policy when talking about share prices. The problem in practice, though, is that it can be hard to say what's froth and what's substance. In the case of the Royal Mail, where the worry is that the public purse could be ripped off, the business secretary ought to know that his "froth" line will look very silly if the shares shoot to a big premium over the flotation price and stay there.

There is, of course, no hard definition of an underpricing. Most of us would regard a one-day, or one-month, premium of less than 10% as within acceptable margins. But 15% would be acutely embarrassing for a government trying to maintain that it sought value for money.

And a premium of 20% – implying a share price of close to 400p if the shares are priced at 330p – should prompt an inquiry. In that case, the business select committee could summon the government advisers from Lazard to relate in detail why they thought £2bn-worth of shares could not have been sold for, say, £2.2bn.

Friday – the first day of trading in Royal Mail shares – is when judgments can start to be made and when Cable's boast that the pricing is "in the right place" will be tested. We shall see. It's all in the price set by the market.

In the meantime, the government has got one thing right and one very wrong in the privatisation process. The mistake was to cap the allocation for retail investors at 30% of the shares being sold. There was no need to be rigid. The subscription level on the retail offer is seven times, and some of that demand could have been satisfied by reducing the institutions' allocation. Were none of the Tories in the cabinet shouting about popular capitalism?

The part that Cable has got right is to use his discretion to pick and choose among the institutional applicants. We'd love to know what criteria he has used to root out spivs (harder than you might think) but a bias towards pension funds is not unreasonable. A preference for retail investors would have been better still.