Sucheta Dalal :Market reform & big-bang IPOs
Sucheta Dalal

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Market reform & big-bang IPOs  

Apr 5, 2004

Judge IPO success only after two months of the stock's listing

By Sucheta Dalal

We are all admirers of Disinvestment Minister Arun Shourie; his outspokenness and honesty makes us proud to have him as a Minister. He is also one of the few Ministers who still find time to read and write extensively. As his columns in this newspaper reveal, he seeks out information from a variety of sources and assembles it into a series of revelations about the subtle and unrelenting change that is taking place in the country. A stockbroker tells me that he never misses an opportunity to listen to Mr. Shourie, because he learns so much from each speech. Shourie remains an investigative journalist at heart and doesn’t allow his role as Union Minister to stop him operating like one. Which means that he also knows the art of providing great copy to the media. A reporter’s worst nightmare is to sit through important seminars or to interview ‘eminent personalities’ and come back with a notepad (or tape recorder these days) full of bland platitudes, stonewalling or recycled wisdom. This never happens with Mr.Shourie. He is candid, unafraid of exposing hypocrisy, undaunted about crushing few egos; and he always guarantees quotable quotes and headline making copy. Remember his recent outburst against investment advisors to the six public sector issues? In an interview to The Week he said. “We gathered all the information available in the stock market itself. I called all the concerned persons and showed them what we had. It made them wet their pants. They realised we had hard evidence on what was happening and they promised to cooperate. All I did was to hold up a mirror and show them what they were doing”. Nobody had ever spoken to or about India’s top investment bankers in those terms. Several weeks later, after the PSU issues have been described as a major triumph, some investment bankers are smarting from insult and loss of face. Especially those who insist they did nothing wrong. The BJP ideologue S.Gurumurthy wrote in another newspaper column that Mr.Shourie also pulled up Reliance Industries, whose investment companies were apparently arbitraging their cash market trades against their futures position, exacerbating the fall of the stock market.

Unfortunately, the heroic tale of three brave men who ‘defeated the conspirators’ (again Gurumurthyspeak) would have made sense if the Disinvestment Minister, the Finance Minister and the SEBI chief had followed up the grave charges of sabotage by launching an investigation against the investment bankers and the corporate house who depressed stock prices.

But instead of an investigation, the Minister was making conciliatory noises within two days after his outburst, when all six public sector offerings proved to be enormously successful. This raises some fundamental questions about whether the government understands the mechanics of the capital market. Let us, for this discussion, ignore everything that happened before the issues opened for subscription - things like the waiver from several IPO rules for the PSUs, bunching and timing of issues and the desperate attempts to pump up the market. Instead, we will focus on the post issue scenario.


For starters, the subscription or even over-subscription of an IPO is indeed an achievement, but a healthy after-market in the stock is what is critical. On that count, the six PSU issues have still to prove themselves. Ideally, the overall success of an IPO should be judged a couple of months after the issue. Barring exceptional circumstances, the stock must be actively traded and remain above the offer price. Otherwise, what looks like a heroic achievement today may look foolish tomorrow.

Until the renewed rally last week, the six PSUs that went public were making investors very nervous. ONGC has still to complete its allotment formalities and some retail investors, who sold in anticipation of allotment, have ended up losing money due to the allotment mix up. Next is the claim that the government can raise Rs 100,000 crore from the primary market next year. ONGC’s big public offer should give us some clues to the future.

Firstly, the allotment debacle proves that capital market infrastructure is not yet geared to handle large volumes and SEBI needs to step up its development function. Secondly, the retail segment of the ONGC issue was under subscribed and that quota went to Qualified Institutional Buyers who are mainly foreigners. Even the High Networth Individuals’ reservation got only a 1.6 time subscription, that too after the Ambani family and their circle of influence made big investments. If the Indian capital market is to be dominated by foreign investors, then the government must consider what will happen when the foreigners decide to dump stock and exit the country in a hurry. It could happen if there is a terrorist threat, a bomb blast, fear of an epidemic (like the bird flu) or political uncertainly. The government would do well to make the capital market more attractive to the small guy before selling more government equity. This means, listening to their problems, addressing their issues and ensuring that politically influential wrong doers are punished.

Finally, there is Shourie’s curious statement in Mumbai that, “The UTI Index Fund should be put to more use than it has been so far.” Is he confusing an Index Fund with a market stabilisation fund of the sort created by ICICI Bank for its issue or by the Hong Kong government after the financial crisis of 1997? The Minister not only did not understand the nature of the Fund, but dealt a great blow to UTI’s newly restored credibility by suggesting that investors money, through the Fund, can be used for “market stabilisation”.

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-- Sucheta Dalal