Sucheta Dalal :Examine the coil to understand the spring
Sucheta Dalal

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Examine the coil to understand the spring  

Jan 2, 2007

 Nissan Copper is a scrip that few had heard about until the last trading day of 2006. On that day, this company made the most incredibly brazen debut on the two national bourses. From a subdued listing at Rs 40, the share price soared to an amazing Rs 136 before closing at a high of Rs 131.

But the price does not even begin to reveal the extent of manipulation in a single day of trading. Nissan Copper, which manufactures copper products, entered the market with a capital of 1.45 crore by making an Initial Public Offering (IPO) of 64.10 lakh shares priced at Rs 39. It raised Rs 25 crore to fund a Rs 35 crore expansion programme, where the balance Rs 10 crore is being funded through term loans.

The run up to the issue was bereft of any hype, probably with good reason. At least three brokerage houses and an investment advisor openly told investors to avoid the issue. One specifically said that post-issue appreciation seemed difficult because of the big jump in capital, prior to the issue by way of a hefty bonus that the promoter group had awarded itself. Yet, Nissan Copper was over-subscribed 4.7 times and only one large brokerage seemed confident of appreciation on listing.

A popular investment website probably provided a clue to the possibility of price rigging. When the site carried a poll on December 8 to find out whether the share would be listed above Rs 50, a surprising 61% said it would. There seemed to be little basis for such optimism and sure enough the scrip debuted at Rs 40 as against the issue price of Rs 39.

Now consider what happened on Friday, December 29. Nissan Copper was listed by the National Stock Exchange (NSE) as the most active share that day, ahead of Reliance, Rcom, India Bulls, Paravsnath, Satyam Computers and others, with a whopping Rs 670 crore worth of shares being traded that day. In terms of numbers, the company which offered 64 lakh shares for public subscription saw 6.99 crore being traded on the NSE on listing day and another 6.11 crore shares being traded on the Bombay Stock Exchange (BSE). Add it up and you have nearly 10 times the capital being traded on a single day.

This is not the first time that the share price has been outrageously manipulated on listing day. What makes Nissan Copper different is that it is the first time this has happened after Sebi’s Integrated Market Surveillance System has turned operational
This level of manipulation was possible only because circuit filters do not operate on the day of listing. The large trading volumes make it clear that the transactions were part of a deliberate manipulation of the share price. This is not the first time that the share price has been outrageously manipulated on listing day. What makes Nissan Copper different is that it is the first time this has happened after the Securities and Exchange Board of India’s (Sebi’s) Integrated Market Surveillance System (IMSS) has turned operational. Since this system is supposed to track and integrate trading data from the stock exchanges, clearing corporations and depositories, theoretically it should be absurdly easy for the regulator to initiate action in the quickest possible time and send a powerful signal to the market that IPO manipulation has got to stop.

The regulator is already on the case. A top Sebi source tells us that two Foreign Institutional Investors (FIIs) as well as persons connected to the company have been identified and the data is being processed for further action. Sebi now needs to demonstrate the IMSS’s capabilities by swift and stringent action.

Incidentally, IPO manipulation is not restricted to post listing price rigging. The Rs 5,000-crore Cairn Energy IPO, which marked the first time that an international company was listing on Indian bourses, also turned fairly sordid. The market was rife with rumours about ‘corporate rivals’ trying to damage the IPO when the market corrected sharply on the day the issue opened. They almost succeeded, except for the fact that institutional investors connected to some of the investment banks ensured a 1.1 time over-subscription on the day the issue opened. In the next few days, hectic lobbying with insurance companies and mutual funds brought in more subscriptions for this high priced issue. Some retail investors also invested. Until the subscription lists closed, the issue showed an over-subscription a little more than two times. However, on the very last day, a one-time subscription vanished as large institutional investors withdrew their bids. According to sources, the withdrawal of bids was by a group of entities connected to two of the lead managers—DSP Merrill Lynch and JM Morgan Stanley. Here too, Sebi has written a letter to the lead managers seeking their comment on the withdrawal.

In fact, a detailed investigation of the Cairn IPO to get to the bottom of how the issue was priced, how subscriptions were canvassed (especially institutional investment) and the basis on which the price and size of the issue was decided is important to ensure the health of the primary market.

While Sebi has accepted a recommendation to introduce mandatory grading for IPOs, if cleared by its board of directors, it is important to remember that such grading will only deal with quality of disclosures made in the prospectus. They will still not help investors to figure out various deals that go into ensuring full subscription of over-priced issue or understanding the post-issue price manipulation. These remain the domain of the regulator and the Nissan Copper and Cairn IPOs show that it has its work cut out.

-- Sucheta Dalal