FROM BUSINESS WORLD OF 30 AUGUST 2005.
Unwelcome attention
Five months ago, Sebi made certain changes in its
Disclosure and Investment Protection Guidelines. The share of non-institutional
investors – that is, unqualified investors who were allowed to bid for any
quantity of shares – was reduced from 25 to 15 per cent. The eligibility of
“retail” investors – Sebi’s term for small investors – was changed from share
applications under Rs 50,000 to under Rs 100,000; and their allocation was
raised from 25 to 35 per cent. The share of Qualified Institutional Buyers
(QIBs) remained at 60 per cent in listed companies and 50 per cent in companies
going public. Instead of having to declare the price band in their prospectus,
companies issuing a Red Herring prospectus were allowed to declare it any time before
the opening of bids.
Last week, Sebi announced some
further changes. If the public holdings in the capital of companies other than
those exempted (such as government companies, infrastructure companies, BIFR
companies and Rule 19 (b) companies) falls below 25 per cent, they will have to
raise it back to that level. QIBs, who till now had only to make bids in
response to offers, will now have to back them up with 10 per cent of their
bid. And of their share, 5 per cent will be reserved for mutual funds. Of the
share of QIBs, 5 per cent was reserved for mutual funds.
Behind these changes is a view of
the capital market that Sebi inherited and has refused to change. Before it
came into being, the government used to underprice issues. That led to excess demand
for them; to ration them out, the government used to insist that investors
could not apply for more than a certain very low number of shares. So investors
made multiple applications, and the share registers of companies were cluttered
with hundreds of thousands of shareholders who were small only in official
view. This racket was widely popular and had political support, so Sebi has
sustained it by creating the equally phony category of retail investor. The
prevalence of multiple applications has come down because underpricing has
declined; but neither has disappeared.
Again, before its birth,
government financial companies like Unit Trust of India used to muscle into
public issues and corner a high proportion of them. In an era of competitive
pricing, they would have been left high and dry; Sebi came to their rescue and
ensured that the largest proportion of new issues would go to QIBs, the new
avatar of government financial institutions which now includes mutual funds and
foreign institutional investors.
The reason Sebi gave for reducing
the share of residual investors was that they sold off their allotments.
Suppose that was true. They would not sell off unless they thereby made a
profit; and they would not profit if the issues were not underpriced. Any
rationing of share allotments reduces the issue price below what it would be
under a completely unrestricted sale.
So whereas it was the intention
of the government completely to abolish its influence on issue pricing, and
whilst Sebi professes to have honoured that intention, it has brought back
underpricing through its rationing of issues. It is therefore no surprise that
allottees sell off shares. If there are some who do not, it can only be because
they want to keep on the right side of Sebi.
Another consequence of Sebi’s
allocations is that they channel new issues primarily into the portfolios of
small investors and QIBs. The first do not sell because they are used to
hoarding rather than trading; the latter do not to keep Sebi happy. So Sebi ensures
an allocation that would keep trading levels low – and then worries about low
floating stock.
Thus Sebi has created work for
itself; but it is unnecessary and undesirable work. Share issues should be sold
to the highest bidder, only subject to the proviso that the price should be the
same for all buyers. That implies that there should be only one bidding
mechanism for all applicants – institutions, small investors, big investors.
Issuing companies should be allowed to call for bids at prices of their choice
– the price band of 20 per cent should be done away with. All investors should
be allowed to make a set of bids at different prices through their brokers, the
issuer should aggregate the bids every day and announce the resulting bid
distribution. This process should continue until a strike price is reached.
Everyone who has bid over the strike price should get the shares he applied
for; no one else should, and there should be no rationing. Sebi should only
monitor the process, and must keep its hands off the outcome.
