FROM THE TELEGRAPH OF 28 JANUARY 2006
A racket returns
A month ago I
got a phone call from a stranger deep in Gujarat. He went on about the Yes Bank
public issue, and about its manager, Karvy Consultants. Sensing a story, I
passed on the telephone number to a junior colleague, who assigned it to his
mental waste bin.
There it rested
until last week, when the caller rang me up again. What he was alleging was
that the issue managers had improperly made millions in the Yes Bank issue, and
that instead of punishing them, Sebi was going after small ‘retail’ investors.
This time I decided to understand the issue myself first. I got hold of two
orders issued by G Anatharaman, whole-time member of Sebi – a 15 December one
on the Yes Bank issue and a 12 January one on the IDFC issue.
The first thing
I noticed was the enormous improvement in drafting. The last time I had read
Sebi reports with some attention was when it banned Ketan Parekh, Shankar
Sharma and other brokers, those ‘naked short sellers’, because they had the
nerve to make the market collapse after Yashwant Sinha’s budget of 2001. I was
appalled by the reports. The standard format was that Parekh, Sharma, or any
other of the people Sebi wanted to nail, sold some shares on day X and time Y,
the price fell at time Y+1, so they were guilty of having caused a market
meltdown. On the basis of those reports, which Sebi never dared publish, it
banned the targetted persons from the market. The government was not content
with such a mild punishment. It hurled income tax authorities and any other
minions it could find at them and imprisoned them. After a few months it
discharged them. The entire action had an extremely questionable factual basis
and no legal basis. No one was convicted of anything. But fear was instilled:
defy the BJP government and you will lose your liberty and livelihood. The
Ketan Parekh affair and the Tehelka affair: they were the worst blots on the
record of the BJP government.
Compared to those
sloppy, incompetent reports, the new ones were much better written. In D R
Mehta’s and G N Bajpai’s times, Sebi used to do slavish, slapdash reports and
punish brokers and traders on their basis. Those affected would go to the
Special Appellate Tribunal or the courts and get the orders turned down, and
then Sebi had to retract its punishment. In his last months, Bajpai learnt the
lesson. He persuaded the government to appoint two new full-time members –
Madhukar and Anantharaman. Of the two, Anatharaman has proved invaluable. His
language is so mellifluous that it will bowl over any judge. His investigation
is meticulous, and he overwhelms the reader with facts; so a judge is likely to
look only at Sebi’s power to impose the punishment Anantharaman imposes. Hence
his orders are much less likely to be overturned.
Let me now come
to the content of the two reports. Both catalogue an operation located in
Ahmedabad, whose major character is one Rupalben Nareshbhai Panchal. Yes Bank
made its public issue in June. Sebi normally allows four weeks for the issue,
at the end of which the shares are rationed out amongst applicants. Sebi
ordains that a certain proportion of the shares must be allotted to ‘retail’
investors, who cannot be given more than a small number of shares each. Soon
after allotment, Rupalben bought the 150 shares allotted to each of 6315
applicants at Rs 45. When the shares were listed in the market, the price
settled around Rs 61. She sold off most of her holdings at that price. And she
was not a lone ranger; there were a score of relatives, friends, and financial
firms around her. They all participated in this game. On an investment of about
Rs 50 million, they made about Rs 18 million in a matter of four weeks.
IDFC made its
issue in July. This time Anatharaman wrote a more elaborate, 49-page report. He
traced the transactions of Rupalben and her gang, and drew neat little bubble
diagrams showing how many shares were sold by whom to whom. They made almost
44,000 applications, or about 17 per cent of the total; they were allotted 11.7
million shares – 8 per cent of the issue. This time Anatharaman did not
calculate the profit made by his subjects, but my reckoning is that they made
about Rs 30 million. Not bad at all. By writing out perhaps 15,000 applications
and cheques, they had made roughly Rs 30 million on an investment of twice as
much.
This Anatharaman
finds shocking and invidious. He chooses his words carefully; but his outrage
cannot be concealed. His language comes to life; I really love this sentence:
“The entire gameplan, craftily designed, masterminded and executed by a coterie
of operators acting in concert, in a tout ensemble through the mechanism of
front-entities of name-lenders seeking to impart a veneer of acceptability to a
deal which is otherwise sham in an agonistic aggression in the market through predatory
cornering is a clear abuse of the very process of IPO, meant to shore up the
participation of retail investors.’ It must make one’s blood boil – whatever it
means.
Except that the
racket operated by Rupalben and her associates is one that was rife in the
1980s. Then there sat a joint secretary in the finance ministry with the grand
title of Chief Controller of Capital Issues (CCIE). He gave out permission to
make public issues; the cream of Indian industrialists used to queue in the
sandstone corridor outside his office to see him. He used a formula based on
past sales and profits which systematically underpriced the issues – the better
the company, the greater the underpricing. As a result, one could make
immediate profit by getting an allotment and selling the shares as soon as they
were listed. The CCIE also laid down a quota for what then were called ‘small’ investors.
There was a scramble for those shares; and many made multiple applications and
made big profits, despite its being illegal. Rupalben was only repeating
history.
Except that I
thought we had ended that history. In 1992, the finance ministry abolished the
CCIE, and transferred his powers to Sebi, which had been set up in 1988 but
given nothing to do. But it deliberately did not transfer the power to price
issues, which was the source of all the racketeering. It abolished that power.
Against our
intentions then, Sebi has reacquired the power – by rationing issues between
so-called promoters, Qualified Institutional Buyers (QIBs), and ‘retail’
investors. Now, the price is essentially negotiated by the issue managers with
big institutional investors. And they extract their pound of flesh – in the Yes
Bank issue, they pocketed a quarter of what the company raised. What my caller
was saying was that the issue manager takes bribes from QIBs for underpricing
the issue; the two together make most of the money at the expense of the
issuing company. What Rupalben made was peanuts compared to investment bankers
and mutual funds. And Sebi will never touch them, for they are only
participating in a racket which owes its existence to its allocation rules.
