One doesn’t know the exact mandate of the Securities Market Infrastructure Leveraging Expert (Smile) task force. But the issues highlighted by ONGC’s share allotment fiasco and in bank IPOs (Initial Public Offerings) need quick redressal rather than long deliberation.
The Smile group certainly has its task cut out for it. Apart from market infrastructure, it may even deliberate on allocating responsibility and fixing liability in future problems, but cleaning up the existing mess cannot be delayed. While the media is still discussing allotment problem of recent public sector offers, here is what has happened with the Bank of Maharashtra (BOM) issue.
Last week, a stockbroker called up from Ahmedabad to complain that BOM had allotted him physical shares although he had clearly asked for electronic credit. Overhearing his conversation, as many as 30 of his investors and colleagues from that single office rushed to hand him their own complaints in the hope that the regulator would take note. A day later, Prithvi Haldea, the leading capital market data aggregator and chief of Prime Database said that his wife too was allotted physical shares when she had asked for electronic credit. A senior bureaucrat in the Finance Ministry also piped up to say he too had received physical shares.
All these are knowledgeable investors who had filled their share application forms correctly and legibly. Why then were they allotted physical shares? A letter that they received from MCS Limited, Registrar and Transfer Agent (RTA) to BOM issue says, ‘‘We find from our records that the shares on allotment have been issued in physical form. In order to mitigate any hardship to investors in getting the shares dematerialised, we are making arrangements with some major Depository Participants to generate Demat Requests on the investors surrendering the shares certificates to the DP.’’ It also promises to confirm demat requests within 48 hours.
The letter does not say why physical shares were allotted in the first place, but it does raise several other questions. First, it makes no mention of the designated DP, secondly, it doesn’t say whether the dematerialisation will be done free of cost. After all, why should investors pay for something that is not their fault?
A third questions is, who sanctioned the printing of so many physical certificates? If the idea of compulsory dematerialisation was to avoid paper related fraud such as fake share certificates, then why are companies printing physical shares in readiness for despatch in such large numbers? We learn that nearly two lakh investors were allotted physical shares. More pertinently, why was BOM allowed to issue physical shares inspite of investor protests over similar incorrect physical allotments by United Commercial Bank (UCO) and Indian Overseas Bank (IOB) issues last October?
Apparently, it happened because the regulator has not yet barred banks from issuing physical shares. Banks have claimed that they are not governed by the Companies Act and hence not subject to the mandate of allotting shares only in dematerialised form.
Moreover, the option of physical allotments allows them to tap a far larger investor base and reach out to geographical locations where they have bank branches but there are no Depository Participants. This allowed UCO Bank and IOB to collect far more applications than they would otherwise have received. The post-issue data analysis of the two bank issues conclusively proves this. A Sebi inspection team had found plenty of irregularities at the Registrars’ end in both IOB and UCO Bank and has recommended stringent penalties. Why then did it make no effort to ensure that the problem was not repeated with the BOM issue?
Senior Sebi (Securities and Exchange Board of India) officials are complacent that problems such as allotment problems amount to under 5 per cent of the public offering which is not overly large. It is not clear if this is based on the feedback of lead managers or has been independently verified. Interestingly, all three bank IPOs (Initial Public Offerings) under discussion had different RTA agents: MCS for BOM, Karvy for UCO Bank and Cameo Services of Chennai for IOB. But in all cases, SBI Caps, which is represented on the Smile task force, was part of the lead managers’ team.
Shouldn’t the lead managers who look after refund, weeding out multiple allotments etc, also be held just as accountable as the Registrars? For instance, Allianz Capital was responsible for BOM; Kotak Mahindra coordinated the efforts in IOB and JP Morgan Stanley in case of UCO Bank.
Anecdotal evidence suggests that many investors dumped with physical allotments simply pay up the cost of converting to demat shares because it is easier than fighting and waiting for redressal.
Investors know that the longer they fight, the more their chances of losing an opportunity to book profits. For instance, the BOM issue was 11 times oversubscribed and its shares, issued at Rs 23, shot up to Rs 43 on listing. Will SEBI ensure that investors are compensated if the price drops before their shares are dematerialised, or the cost of converting physical shares to electronic form?
This is an issue that the Task Force must indeed deliberate upon. It should also ensure that Registrars as well as lead managers in charge of post-issue work are adequately insured to meet compensation payments to investors in case of future blunders. After all, according to Sebi’s own estimates, over 35,000 investors to the ONGC issue are still to get their allotment/refund, or, have not been allotted their rightful shares on the grounds of insufficient funds, even when their cheques more than adequately covered the cost of refund. They have a right to redressal.
Finally, it is interesting to note that although the Sebi set up a ‘‘high powered’’ task force to examine market infrastructure, it has not felt the need to include representation from some key stakeholder in the capital market namely retail investor, brokers and even Registrars to issues.