FROM BUSINESS WORLD OF 15 JANUARY 2006
Invitation to a
racket
It is not
established that Rupalben Nareshbhai Panchal of Vastrapur, Ahmedabad exists;
but whether she does or not, she is a formidable lady. She applied for 1050
shares of Yes Bank and got none. But she financed applications of an uncounted
number of people, 6315 of whom got allotments. She bought all the 947,250
shares allotted to them at Rs 45 each, and sold 931,600 of them in the market
at about Rs 61, making a cool Rs 15 million. The issue was oversubscribed 9.66
times. Even if her nominees had no higher chance of allotment, she got a 4 per
cent return on her Rs 400 million in four weeks. In the IDFC issue in July, she
similarly got hold of a breathtaking 3.2 million shares. Even the industrious
moles of Sebi could not work out her profit, which must have been about twice
she made in the Yes Bank issue. Since the oversubscription this time was only
5.32 times, her return must have been even higher.
When Sebi nailed
her down, it banned her from dealing in the shares of any future IPOs, as it
did 24 of her ilk. Her profiteering must excite jealousy, so many people will
applaud the punishment. Many will be shocked at the mild slap on the wrist she
received, and will be baying for her blood. But it is still necessary to ask:
what is her crime?
At one time,
Sebi used to hold a kangaroo court; Ketan Parekh and others accused of a scam
after the 2001 budget was greeted by a market meltdown were punished on the
basis of reports that were never made public. In the Yes Bank and IDFC affairs,
Sebi has put out detailed reports. However, when it comes to indictment, it
uses strong but vague language such as ‘abusing the allotment process’,
‘agonistic aggression’, “predatory cornering’, ‘unjust enrichment’, and ‘a
manipulative assemblage to scupper the process of IPO allotment’.
If Rupalben is
guilty of such violent crimes, why is she not behind bars? Because Sebi cannot
put her there. Buying cheap and selling at a higher price happens to be a
legitimate activity engaging millions in this country. Trading can be illegal –
for instance, trading in tiger skins- if there is a law against it. And the law
happens in this case to be Section 11(4)b of the Sebi Act, which empowers Sebi
to restrain persons from accessing the securities market, not for any crime,
but just on Sebi carrying out an investigation or enquiry. Under this
provision, Sebi has banned an undisclosed number of ‘entities’ for such vague
crimes as ‘base cupidity to wangle a patently unfair gain’. Sebi does not have
to find anyone guilty, let alone establish their guilt to exclude them from the
market; all it has to do is to institute an enquiry.
But,
irrespective of Sebi’s arbitrary powers, has not Rupalben erred? What she did
would, in any other market, be called arbitrage. There is one price for IPOs
that bidders for IPOs have to pay, and there is another, considerably higher
price set by the market as soon as the shares are traded; she bought at one and
sold at another.
Sebi itself has created
this dual market. It has created a retail investors’ quota. This quota is
rationed out to investors in two stages. First, they must apply for no more
shares than Sebi says; next, if the bids exceed, the quota, the issuing company
accepts some bids and rejects the rest. Anyone who gets past these two hurdles
makes a windfall gain, and is free to cash it the day the shares are listed.
That is entirely with Sebi’s blessings. But it wants investors to be greedy in
small doses: it wants them to bid for only a small number of shares if they
want to make easy profits.
This
dispensation goes back to the days before the reforms. Then, a Chief Controller
of Capital Issues in the finance ministry used to fix IPO prices so that every
issue was underpriced. Then he fixed a quota for ‘small’ investors, thus ensuring
that they all made easy profits. He set the same rules as Sebi now. Investors
made multiple applications as now. Rupalben is just the descendant of a
flourishing breed of that time.
It was to end
that racket that when the finance ministry transferred its powers to Sebi in
1992, it did not pass on the power to price issues, abolishing it instead. Sebi
has acquired it by indirect means – by taking the power to allocate issues. It
has given a huge quota to big institutional investors, who ensure profits for
themselves by negotiating a low price with the issuing company. And Sebi allows
a few ‘retail’ investors to muscle in on the racket to make it look fair. Call
it by any other name, it is still the same racket that Manmohan Singh sought to
abolish and failed.
