Sucheta Dalal :Impressions of a buoyant and revived primary market (9 Feb)
Sucheta Dalal

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Impressions of a buoyant and revived primary market (9 Feb)  

Dr Manmohan Singh is not only among our best-regarded finance ministers but he is also credited with having kick-started the liberalisation process in 1990-91 at the time of maximum gloom and pessimism. Yet, when it came to disinvesting government holding in the ‘temples of modern India’, he chose to throw out the rulebook. Probably because they are owned directly by the President of India, Public Sector Undertakings (PSUs) were allowed to issue and list equity and bonds without the necessary infrastructure to service shareholders and without stringent disclosures norms that are the touchstone of a modern capital market.

Some PSUs did not set up a share transfer department or print bond certificates up to four years after they were listed. Consequently, when investigations began into the scam of 1992, agencies found that allotment letters were being freely traded. Those days, the government had ignored G. V. Ramakrishna, the then Sebi chairman who had pleaded for some basic disclosures by PSUs before they were listed.

A decade later, things aren’t very different. Although pubic sector banks and companies have been listed on stock exchanges for several years, they still demand and get special treatment. Last week the disinvestment ministry announced its timetable for a bunch of PSU IPOs (Initial Public Offerings). It could do this very quickly because a helpful Sebi, trying to ‘facilitate the disinvestment process’ had allowed PSUs to short-circuit IPO rules. Obviously, Sebi couldn’t simply allow PSUs to ignore the rulebook. So it pointed them to a neat little solution, specifically thought up to allow them to wriggle through to the market. PSUs, advised by their investment bankers, will always lobby for concessions.

But it is up to the ‘independent’ market regulator to stand firm and refuse them special status. In the year 2000, PSUs had demanded that their strategic sales be exempt from an open offer to the public. Fortunately, Sebi followed a system where all such requests are put to select committees. It was placed before the Takeover Committee, which shot down the demand and insisted that strategic buyers would have to make open offers to retail investors.

This time however, Sebi didn’t go to any committee. Instead, when the Ministry of Disinvestment sought exemptions from IPO rules, here is what the regulator did. It wrote back saying that while it was all willing to offer support and guidance, it has no powers or guidelines under which to regulate these mega issues. So, it asked the PSUs to simply call their offers a ‘sale’ document rather than a prospectus or offer document, but at the same time urged them to follow disclosure norms. That way, it didn’t need to frame new rules or take the exemptions to any committee. Media reports say that ONGC and Gail had sought several concessions in disclosure rules, since they plan to break new ground by making ‘mega’ IPOs of already listed companies.

They wanted permission to announce the price band and floor price of their IPOs only a day before the bidding starts, instead of stating it in the red herring prospectus. They also wanted a price band wider than 20 per cent and a minimum allotment size that would be lower than the minimum application size.

In other words, investment bankers sought to cover every possible downside that could possibly occur in the process of raising money successfully. For instance they know that the secondary market prices of Gail and ONGC should be the benchmark for a sensibly priced old-fashioned IPO, but that has a couple of drawbacks.

Firstly, investment bankers know that the stock prices of ONGC and Gail are based on low floating stock (in ONGC, the public holding is a mere 1.14 per cent of its equity) and are bound to decline when a big multiple of the existing float is offered for sale.

Naturally, these scrips could come under selling pressure as the offer date approaches and lead managers may want to manage perception and not signal any pricing weakness by indicating a lower price band. Then why not make an old fashioned, low priced IPO? Because, the government wants money and a book built issue today offers the best possibility of creating false hype and huge over-subscription.

An analysis of IPO data by Sebi shows that Qualified Institutional Buyers (QIBs) and Non Institutional Buyers (NIBs) cause a big over-subscription within hours after the bids open and lure retail investors into applying for IPOs. NIBs are large, leveraged investors, who merely gamble on allotment and have to dump a substantial chunk of their holding within two months of listing.

In fact, Sebi found that they are the most unstable investors and sold anywhere between 40 to 78 per cent of their allotment soon after listing in order to pay back the financier with interest. They are also the class of investors who create the maximum noise and over-subscription in an issue.

These gamblers give the impression of a buoyant and revived primary market, which is probably exaggerated. It is only after the first few mega IPOs have hit the market that the true extent of investors’ appetite will be tested. That is probably why neither RBI nor Sebi are willing to block the generous IPO financing of NIBs by Non Banking Finance Companies (NBFCs), at least until the big PSU offers are out of the way. If the primary market chokes on these big offerings, it won’t really matter because Parliament would be dissolved and the country will be in election mode.

As for the rest of the large IPO pipeline, it can simply pack up and forget about raising money. On the other hand, if the market doesn’t tank, and fresh foreign money keeps mopping up new offerings, then it is only a matter of time before the powerful investment banker lobby begins to push for the concessions to be extended to all IPOs.

That is exactly how various rules and regulations in the capital market were diluted during the seven-year period leading up to the year 2000.

-- Sucheta Dalal