After asking Life Insurance Corporation (LIC) to repeatedly bail out public sector disinvestment issues, the government seems to be headed for some sensible policy changes. These changes, apparently the result of the low-key efforts of disinvestment secretary, Sumit Bose, could revive retail investor interest and smoothen the divestment process.
For starters, there is a recognition that investment bankers and brokers need to be paid for their services in order to get the best results. This has led to the adoption of a new selection process that gives weightage to the experience and background of the investment bank and not merely the fee quoted.
Investment banks usually quote an all-inclusive fee that includes the various costs and charges, including fees to be paid to the regulator, the stock exchanges and other issue-related expenses like the costs of advertising & public relations agencies (but not the issue advertisements). This led to a debilitating competition; the fee quoted to win a bid was often so low that the investment bank itself earned nothing and retail brokers were not paid selling commissions, often causing them to conduct negative marketing to damage the company’s fund-raising prospects.
According to sources, the government will soon take a few important decisions. First, to pay a selling commission to retail brokers and ensure that they have an incentive to market the issue. Second, to reject negative bids, because an investment bank which earns nothing is unlikely to do its best to sell the issue.
The government has also decided to offer a 5% discount to retail investors. A suggestion to enhance the discount for retail investors to 10% has, however, met with some resistance. The government’s ignorance about the drastic depletion in the retail investor population is evident from the woolly reactions to the suggestion. One was that a 10% discount should be tied to a lock-in period because investors may sell on listing. Well, let them sell the shares and make a profit. In our view, when the retail investor quota of most IPOs is severely undersubscribed, it is time for drastic action to revive investor interest. The discount and the post-listing trading will create enough of a buzz to attract retail investors once again. The same applies to follow-on offers of PSUs. Many of these companies have negligible floating stock and an artificially high secondary market price. Discounts to retail investors on these offers are a good idea; all we need is for the regulator to ensure that there is no attempt to corner this quota or transfer the discount to other segments. — Sucheta Dalal
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