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A cure deadlier than the disease?
Ashok Kumar | July 07, 2003
Last fortnight, in this very column, I had elucidated the ways in which the book-building process, as it stood then, was open to abuse. I had also concluded the column with these lines: "So, should Sebi intervene?"
Not at all. Ours is a free market, and I am against any mollycoddling of retail investors. If they cannot see through the machinations of an operator, they have no business being at the bourses.
If they still choose to flock to the bourses, driven by what cannot in any manner be described as altruistic motives, well, they deserve what they get.
Of course, the Sebi would do well to streamline the procedural aspects of a book-building IPO and also have a second-look at the disproportionate discretionary power accorded to the lead managing book-runner.
Hopefully, they would not do anything ham-handed to spoil the new-found hope in the primary market.
After all, that is where the key to the secondary market boom lies, contrary to what one of our ex-finance ministers thought. Almost as if on cue, Sebi announced its new guidelines pertaining to book-built IPOs the very next day.
While the intent may have been good, the fact is Sebi's new guidelines, barring the odd one, aggravate, rather than solve the problem.
Let us take a closer look at some of the more prominent guidelines. The allocation quota for quantitative institutional buyers has been reduced from 60 per cent to 50 per cent, whereas that of retail investors has been increased proportionately.
Theoretically, while this sounds good, the problem lies in the fact that historically the book-building process was introduced as a means for the retail investor to get a fair`discovered' price, arrived at through institutional bidding.
So, we now have a scenario where the onus of price discovery has fallen back onto the laps of the retail investor!
Now, the institutional investor, bidding and determining the price would have been ideal but for the fact that their money is not where their bid is.
Simply put, they can bid at absurdly high prices, thus fuelling demand, without committing a single rupee towards the bid.
Sebi, in its wisdom, has cut off one of their escape routes by mandating that withdrawal of bids will no longer be permitted. Of course, what they have failed to do is shut the back door too, as revision of bids remains permissible.
To buttress this point, let us assume that an institutional investor had bid Rs 390 for a book-built IPO with Rs 115 as the floor price.
By the last day, when it is evident that the book will close at around Rs 125, the institutional investor can revise that bid downwards to Rs 115, knowing fully well that it will not figure in the allotment sweepstakes.
Purely co-incidentally perhaps, media coverage of the first bid of Rs 390 could ensure that several gullible retail investors revise their bids upwards fearing that there is now a fair chance that they might lose out on allotment by sticking to the floor price.
Another new guideline, which is the floating rate band, would serve as an ideal tool to further confuse and lure investors. So, what is the bottomline here?
For starters, make institutional investors deposit some margin money for bids, part of which should be deducted for every downward price revision. Better still, perhaps, let the QIBs be allotted shares at higher than the floor prices that they bid at.
If you think that is harsh on QIBs, well, think again. Remember, they are supposedly the `better informed' investors!
The next Sebi guideline involves classifying a retail investor. Whereas the earlier quantitative parameter, in the form of the 1,000 shares limit, was undoubtedly farcial, the new one caps it at a monetary limit of Rs 50,000.
Touching though Sebi's comprehension and concern for the small investor is the fact the sum involved is ridiculously small. Unwittingly perhaps, the only good it has done is that it possibly eliminates the financing do-gooders who feed off gullible retail investors.
However, it opens up a logistical nightmare in the sense that it will almost inevitably trigger off multiple applications, a bane of the primary market in the early days of the last decade.
Furthermore, this probability is further enhanced by the fact that investments aggregating less than Rs 50,000 need not be accompanied by any PAN number. Sadly, this suggests that we are really moving around in circles.
Against this backdrop, one has to sympathise with the banking system and the otherwise not sympathy-worthy merchant banking class.
The latter have a logistical nightmare on their hands with the latest listing guideline, which stipulates that the lead time to listing has been reduced to six days from the issue closing date.
May the Goddess bless them, just as she seems to have blessed the Indian stockmarket which has begun rallying once again for reasons that do not go beyond the `feel good' factor.
After the two-and-a-half year drought at the bourses, no one is complaining though !
(Ashok Kumar heads Lotus Strategic Consultants, Mumbai.)