When there is open disagreement between the finance ministry and the Reserve Bank on interest rates or foreign portfolio investment, it worries investors. Ironically, it is equally worrying when the ministry and its regulator think alike.
Within days of one another, the finance ministry and the Securities and Exchange Board of India (Sebi) have issued draft regulations making it easy for companies to delist their shares from stock exchanges and throw out minority investors who may have bought the shares at a hefty premium. Both sets of guidelines have been drafted without any public consultation (they are now up for public discussion) and have come at a time when DLF’s treatment of minority investors has been making headlines.
Sebi has proposed to scrap the ‘reverse book building’ (RBB) mechanism, which allowed investors to decide the price at which companies can buy them out and delist their shares. Companies claimed the RBB mechanism was cumbersome, although it was electronically conducted by stock exchanges. Their resentment over investors deciding the exit price is hardly unexpected. After all, don’t companies resent having to appoint independent directors and audit committees? But they have learnt to live with it under pressure from the regulator.
In this case however, M Damodaran had apparently decided to scrap RBB when he took over as Sebi chairman.In May 2005, he promised "good news" in the form of a simpler exit route for companies. "We are looking for an alternative to the reverse book building process, which is being seen as a costly and difficult mechanism," he had said.
For the record, RBB was born out of a Sebi-appointed committee on which the representative from an investment bank was the lone dissenter, that too on the grounds that it would not give retail investors a fair deal. Although the majority view prevailed, corporate India seems ready to have the last laugh despite evidence that RBB has worked quite well. A majority of RBB proposals have been successful, many companies have been able to delist at near about their proposed reserve price and just a tiny minority have failed. The process eliminates frivolous or extreme bids and picks the exit price as one that receives the maximum bids.
Yet, Sebi has bought the corporate argument that RBB is cumbersome and has now proposed an exit price that will be the higher of the fixed price (which is a 25% premium to the average of 26 weeks highs and lows) or the "fair price" which will be determined by a rating agency. If a rating agency can decide the ‘fair’ price to delist shares why is corporate India objecting to IPO grading by the same agencies to ensure only reasonably sound companies get listed in the first place?
Sebi must explain why it plans to permit companies to decide when to pick up investors’ money through IPOs and determine the time and price of their exit as well. Given Sebi’s poor record of tracking market manipulation or corporate disclosure, firms can easily suppress profits and dampen market price when planning to de-list their shares.
In a powerful bull run, which has seen the benchmark Sensex shoot up from around 2300 (30 April 2003) to 13703 (24 November 2006) in just over three years, can Sebi claim to decide whether a 25% exit premium is fair? More importantly, why should it change a mechanism that allows investors to decide their price either correctly or incorrectly?
The ministry’s proposal on delisting companies is equally against minority investors. It proposes to allow bourses to delist companies on the following gro-unds—losses in the preceding three years, when net worth falls below paid up capital, failure to comply with stock ex-change norms (such as providing the correct corporate address), when public shareholding drops below mandated threshold, when shares have been suspended during the previous three months or there is a serious violation of SCRA rules.
In each case, the ministry proposes to punish investors rather than the management for corporate failure and mis-management. All that the investor can hope for is an exit price, but it is unclear how the ministry expects to ensure that companies pay that either. The bigger question is, shouldn’t the ministry and the regulator be worrying about weeding out dubious and expensive IPOs instead of facilitating de-listing?