FROM BUSINESS WORLD OF 9 DECEMBER 2006
Injury added to
insult
I have pointed
out earlier in these columns that Sebi has reinvented a crime that is no crime,
namely multiple applications from “retail” shareholders. This category is
itself an official invention. There was a time, many decades ago, when the
government regarded itself as a protector of the weak and the foolish. It
feared that wily industrialists would overcharge subscribers for new issues of
shares. So it controlled the prices of new issues on the basis of the past performance
of the companies. The price control ensured that demand would exceed the shares
offered by companies whose prospects were better than their past performance. So
the government rationed the new issues. Amongst those whom the rationing system
favoured were those that the government called “small” shareholders – they were
asked to apply for not more than a certain number of shares. Because the shares
were underpriced, the “small” shareholders made a windfall gain as soon as they
got an allotment. This subsidy was a political handout, designed to win the
support of such “small” fellows. The easy gains led to fellows making many
applications so as to multiply their profits; some were caught and mildly
punished, while most just got away with their ill gotten gains.
When the finance
ministry passed on its regulatory powers to Sebi in 1992, it decided to abolish
this political racket. It abolished its power to control issue prices,
expecting that if Sebi could not underprice issues, there would be no excess
demand for shares, no windfall gains to allottees, and hence no excess demand
for shares.
But it
underestimated the cleverness of the bureaucrats whom it filled up Sebi with.
They realized that they did not have to control prices directly; they could ensure
underpricing if they introduced rationing of issues. They decreed a big chunk
of new issues for those they chose to christen Qualified Institutional
Investors (QIIs) – the big banks and financial institutions. They form an
oligopoly. They know that unless they take their share, a company will not be
able to make an issue at all. So together they beat down the price so that they
can make windfall. So Sebi has ensured that all issues are underpriced.
And then it
revived the dead and unlamented “small” investors, and renamed them “retail”
investors. It reserved a quota for them, and decreed that they would get shares
at the same price at the big fellows – and consequently make undeserved profits
as soon as they got an allotment.
This systematic
underpricing revived multiple applications that were so common in the old days
of paternalistic socialism. Then came one “retail” investor, Rupalben
Nareshbhai Panchal, who did it in style: she made thousands of applications and
made crores. Then Sebi suddenly woke up, and started a witchhunt. The real
“culprits” are “retail” investors like Rupalben. But even if Sebi employed the
entire staff of the governments of India, the states, municipalities and
panchayats, it could not unearth and punish all the culprits.
So it has
punished the depository participants (DPs) with whom the “afferent entities”
had accounts, and the brokers through whom they made multiple applications. To
do so it has invented a new crime – that they should “know their client”. My DP
had been forced to “know” me before Sebi told it because it is also my bank;
and my broker just thinks he knows me. But if DPs and brokers take their job
seriously, they are going to have to collect a lot of paper from millions of
clients; until they do so, they will be foolhardy to let those clients trade.
As it is, there
are millions of “small” shareholders who got shares in the old socialist days
and who still have not dematerialized them. To them will be added millions more
who dematerialized them but will not be able to trade them.
So what will
their exclusion do? It will reduce the demand for new issues and accentuate
their underpricing. As it is, the underpricing enforced by Sebi has induced
companies to avoid the Indian stock market – issue shares abroad, or in private
deals to various banks and financial institutions; Sebi’s “know your client”
evangelism will make them run away faster.
It is remarkable
what a small share of investment is financed by share issues, what a small
proportion of business is done by publicly quoted companies in this country. For
this unimportance of the stock market, Sebi is directly responsible. It may
think it is doing a great job of protecting the fictitious “retail” investor,
but actually, it has done him a great disservice.
