Sucheta Dalal :Maruti issue oversubscribed 13 times but how? (23 June 2003)
Sucheta Dalal

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Maruti issue oversubscribed 13 times, but how? (23 June 2003)  

It is nobody’s intention to rain on the Disinvestment Ministry’s parade or to devalue the efforts of investment bankers who pulled off a 13-time over-subscription to the Maruti Udyog issue. In a market starved of good issues, the Maruti public issue is indeed a good investment offering. It is also clear that a large successful public issue is something Indian investors, issuers and investment bankers needed rather desperately. But let us put a perspective on the hyperbole that has surrounded Maruti’s ‘‘phenomenal’’ success and check if the trends it has started are healthy for the primary market’s future growth.

Start with the fact that the issue was oversubscribed within three hours after it opened. How did that happen? It is rather simple.

Maruti Udyog’s Rs 830 crore offer was entirely through the book-building route at a floor price of Rs 115 per share of Rs 5. This means that investors had to bid for the issue at the floor or higher and the allotment price would be decided by investment bankers and the offeror at a figure that would ensure an active post-issue market for the shares. It now seems likely that the government will raise almost Rs 1,000 crore at a price of Rs 125 per share. This is in addition to a similar amount already collected from Suzuki Motor Company on transfer of its controlling stake.

However, 60 per cent of the issue was to be allotted to Qualified Institutional Buyers (QIBs) who were banks, mutual funds, and institutions at the discretion of the investment banker. Another 15 per cent was reserved for High Networth Individuals (HNIs) bidding for more than 1000 shares and 25 per cent was reserved for retail investors bidding under 1,000 shares. Allotment in the last two categories would be on a pro-rata basis.

Here is what happened on the day that the already hyped up issue opened. Investment bankers called mutual funds and other QIBs to bid for at least five times the shares that they wanted, if they hoped to get any allotment. Since QIBs do not have to pay any margin, and are allowed to revise the size of the bid and the price any number of times during the bidding process, or withdraw their bids altogether, they immediately complied. Moreover, the bigger the allotment and the greater the hype, the better are the chances that the issue would open for trading at a substantial premium to the issue price. This also gives them an opportunity to book profits immediately on listing.

If 60 per cent of the issue is reserved for QIBs and most of them bid up to five or six times the shares they required, the issue was naturally oversubscribed within three hours after opening. Sources in the finance business say that most mutual funds bid far more than the funds available with them for investment. Would any of them have bid five times their requirement if they have to pay a margin of even 25 per cent of their bid? Probably not. And if they did, they would need to borrow the money and pay interest on it until the allotment.

Once the issue was declared a whopping success on Day 1, investment bankers could make another round of calls before the books closed - this time to ask QIBs to raise their offer price if they hoped to get any allotment. As the post issue analysis would show, it is the QIBs bids that account for most of the oversubscription. And why not, after all, they pay nothing when they bid, and lose nothing if they are allotted no shares.

With the issue a declared success on Day 1, retail investors also went into a subscription frenzy that seemed a repeat of Morgan Stanley’s entry into the mutual fund business in early 1994 (investment bankers know how to do these things). All the banks offering cheap subscription funding fanned investor’s greed. Investors have rushed in hoping to sell their shares on listing and make a return of over 20 per cent on their initial investment within a few weeks. The fact that banks offered lower interest rates on bigger applications also encouraged investors to apply for a far larger number of shares.

But investors who are punting on public issues with the benefit of bank finance are hardly genuine investors who would revive the primary market. They are simply looking for a quick buck. Thanks to bank funding and no-margin for QIBs, the Maruti IPO is understood to have netted in excess of Rs 10,000 crore on its Rs 830 crore offer (at the floor price). It’s offer of 7.22 crore shares received bids for 61.9 crore shares with a significant number at well above the floor price.

Never mind the flawed process, the government is euphoric about the success of Maruti and still busy talking up the primary market. If the price remains high, it can sell its remaining stake of 20 per cent at a substantial premium. The government also hopes to repeat the success of Maruti with the issues of National Aluminium Company (Nalco) and Bharat Petroleum Corporation’s (BPCL) public issues. Newspapers have talked about simultaneous listings in India and abroad, even though no applications have been made to the Securities and Exchange Board of India (Sebi).

But a Maruti IPO, fully underwritten by Suzuki Motor Company will be very different from Nalco and BPCL. But even before those two issues are on offer, the primary market would have turned extremely speculative and unhealthy. Also, investors’ expectations, based on borrowed funds and instant returns would have been built so high that anything short of expectation could cause the revival process to skid.

Also, as it happened with the speculation in bank stocks, the government will be a big contributor in whipping up a frenzy and ruining what could be a genuine revival.

Sebi needs to step in at this point and rein in the mania. It also needs to impress on the government that it is on par with any other promoter planning to exit a company through an offer for sale. This means that ministers and officials have to follow the same rules as private industrialists and refrain from making premature statements, exaggerated claims and above all from talking up the market.

-- Sucheta Dalal