Sucheta Dalal :A day of tough decisions by the regulator
Sucheta Dalal

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A day of tough decisions by the regulator  

August 29, 2005


The Dissection: Sebi is correct in not tampering with reservation for retail investors despite pressure


Although it took three committee recommendations and nearly a year more for the Securities and Exchange Board of India (Sebi) to end discretionary allotment to institutional investors in Initial Public Offerings (IPOs) and to force them to pay a small margin of 10 per cent, the delay is understandable.


It has been a difficult decision to make because discretionary allotment by lead managers is permitted all over the world, despite plenty of evidence of its deliberate misuse to favour investor cronies and large clients.


Investigations that followed the bursting of the dotcom bubble had especially exposed investment bankers’ malpractices, but it did not lead to a significant change in the rules.


Internationally, institutional investors do not pay margins either, but then the composition of investors and listing procedures are also different. Moreover, retail and institutional investors are not part of the same book and cannot send price signals to each other.


In India, there is overwhelming evidence that over-subscription of the Qualified Institutional Buyers (QIB) segment, within minutes after the book opens, is carefully engineered to send positive signals to retail investors and ensure issue subscription at inflated prices.


That is why the Malegam Committee, the SMILE task force as well as the Primary Market Advisory Committee had spent a lot of time investigating subscription and allotment patterns and recommended regulatory action.


That discretionary allotment is not even barred by the US only underlines the enormous clout of global financial conglomerates. Sebi was equally under pressure to maintain status quo. The regulator must be complimented for ignoring international practice in favour of what is good for Indian investors.


It must also be remembered that this step has been taken after several intermediate moves to prevent the misuse by QIBs of their freedom to make and revise bids with no financial implication.


Still, Sebi and the government must be prepared for howls of protest from the international investor community as well as the scorn or criticism that will come its way. This will be especially if the secondary market goes into a correction next week. Fortunately, both retail investors as well as Indian institutional investors are strongly supportive of the regulator’s action.


The Sebi decision to reserve a 5 per cent quota for mutual funds, while also permitting them to compete in the 50 per cent slotted for Qualified Institutional Buyer (QIB), is another welcome development.


Sebi is also correct in not tampering with the reservation for retail investors despite pressure to do so. Indian retail investors have yet to show the maturity to make pricing decisions.


The SMILE committee found that 97 per cent of retail investors bid at the cut-off price and that is one of the reasons why a majority of retail investors bid higher for the TCS issue while most QIBs had bid at the lower end of the price band.


This lack of maturity implies that the retail segment will be first to be undersubcribed if the Bull Run shows signs of petering out, so it makes sense not to tamper with the retail quota only because small investors want bigger allotments when the going is good.


In a day of tough actions, Sebi gladdened the hearts of retail investors with its decision to ensure 25 per continuous public shareholding.


The move would have been more complete if Sebi had used the opportunity to reiterate that public shareholding holding implies only the Indian public and does not include GDR and ADR issues.


The two-year time frame for compliance by companies under the minimum public holding criteria is also a dilution of a tough action. But Sebi can counter this by following up its decision by identifying the large number of listed companies whose public holding is far below listing regulations and pressuring them into quick compliance.


The next few months will show whether promoter groups actually dilute their holding to allow a genuine increase in public holding or merely transfer it front companies.


There is also a possibility that Sebi’s action will encourage a few companies to delist their shares rather than increase public participation.


We’re are not concerned with the level of market: Sebi chief


MUMBAI: Sebi Chairman M. Damodaran did not comment directly about Sebi board member Madhukar’s controversial statement about the Sensex touching 16,000 level in a year. However, he made it clear that Sebi is not in the business of predicting Sensex levels.


‘‘Sebi’s not concerned with the level of the market. In this background, it’s best to put behind us any controversy or statement. We’re not concerned with the level of the market. We are interested in the orderly conduct of the market,’’ he said after a Sebi board meeting.


‘‘Sebi’s mandate is to act in the interest of investors. Sebi is not in the business of advising the investors on what’s the good time to invest and what stocks to invest,’’ Damodaran said. Many investor associations had filed complaints against Madhukar’s statement recently.-ENS








-- Sucheta Dalal