Sucheta Dalal :Missed opportunity
Sucheta Dalal

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Missed opportunity  

Mar 12, 2007

The Securities and Exchange Board of India (Sebi) missed an opportunity to initiate mandatory grading of IPOs (Initial Public Offerings) in its last board meeting, although the issue has been dragging on for well over a year. Last week’s sharp correction and violent price swings will probably make any regulatory intervention unnecessary. Several large companies, especially in the realty sector, are either postponing their IPO plans (like Orbit Corporation) or are reducing their offer price bands. Some are even reconsidering their listing plans. The big blow came last week, when three companies, barring MindTree Consulting, listed at steep discounts of 29 to 40 per cent.

This column has previously drawn attention to the massive price manipulation that occurs on listing day to settle pre-IPO financing arrangements. When companies begin to list at a big discount, such financiers are the first to vanish, scuttling the listing plans of dubious companies. If that happens, the grading process may become redundant.

Curious developments

The Stock Holding Corporation of India’s (SHCIL) e-stamping contract is now attracting the attention of government investigation agencies. After the massive fake stamp scam (Telgi scam) the government decided to launch electronic stamping of revenue documents and SHCIL bagged the mandate to become the Central Record Keeping Agency. IFCI, which has a 16.9 per cent stake in SHCIL, was a project consultant for awarding the e-stamping contract. The technology will come from Crimsonlogic Global of Singapore. Curiously, the Ministry of Commerce on 7 November 2006 permitted SHCIL to make the technology payment to Unitec Value Solutions Ptd Ltd, instead of paying Crimson Logic directly.

The presence of this intermediary is attracting the attention of investigation agencies, especially because Unitec Value Solutions is linked to SHCIL Services Ltd., a subsidiary of SHCIL. Incidentally, the agencies are also looking at SHCIL’s holding in this subsdiary, since over 76 per cent of the shareholding has reportedly passed into private hands. IFCI has also raised questions about this sale. SHCIL is a large Custodian and epository Participant and owned by several government institutions; yet, it was badly indicted in the Ketan Parekh scam.

Even then, its e-stamping operation will be largely unregulated; both its regulators — Sebi and NSDL — told this paper that they will not look into these operations. So who will?

Information void

Caveat Emptor or Investor Beware is the guiding principle for capital market investment. Yet, very little information is actually available to investors in the public domain. Forget about investors, even the media finds it tough to get basic information such as shareholding pattern as we found in the SHCIL case. Even less is known about SHCIL Services, which was allowed to start brokerage operations in 2006. The Bombay Stock Exchange website lists SHCIL Services Ltd. as a firm belonging to SHCIL; but no information about shareholding is available either at the bourse website, the Registrar of Companies or on the Sebi website. This is clearly relevant information for shareholders, especially if 76 per cent of the stake has been sold off to private parties. It is clearly a regulatory anomaly that the capital market watchdog has exacting standards of reporting and disclosure for listed companies, but does not require equal disclosure from market intermediaries under its direct supervision.

All steamed up

The market regulator, the post office and the Reserve Bank of India (RBI) are apparently all steamed up about Prudential ICICI Mutual Funds’ new marketing gimmick. Its latest scheme, Fusion Fund-II offered its agents an extra 0.5 per cent commission if they specifically targeted investors of RBI bonds or Post Office savings and attached proof of the same along with the application form. One doesn’t know whether Fusion Fund was looking to expand the mutual fund investor base by incentivising agents to reach a new set of investors or merely believed that people who put their money in Post Office savings schemes have a long-term investment horizon. Anyway, the Post Office decided that its investors were being poached and terminated its arrangement to sell the scheme. Sebi was also outraged enough to order that the incentive scheme be scrapped. But one is not quite clear why Sebi is angry.

Does the regulator object to commission incentives for agents? After all, there is neither incentive nor inducement for investors to switch from RBI bonds/ post office savings to mutual funds; only the agent is rewarded. It is, however, unlikely that investors would part with a photocopy of unrelated investments, unless the agents offered a kickback from the extra commission they earn. While Sebi appears to have raised issues of ethics, it is not clear if a potential kickback to investors is the issue here. At a time when interest rates on safer instruments like bank fixed deposits have risen swiftly in the last couple of months, it seems a little far-fetched to worry that a 0.5 per cent commission would be incentive enough for investors to switch investments from RBI bonds and post offices to mutual funds.

-- Sucheta Dalal