Sucheta Dalal :Rushing Policy Changes on IPO
Sucheta Dalal

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Rushing Policy Changes on IPO  

April 8, 2008

Exclusive news, the stories behind the headlines and the truth between the lines Edited by SUCHETA DALAL


Rushing Policy Changes


On 14th November, as the Sensex was soaring 900 points, the Securities and Exchange Board of India's (SEBI) board meeting at Chennai was being watched with great anticipation in Mumbai. There were two major items on the agenda -  to reduce the face value of all shares to one rupee, to relax the norms for infrastructure issues and permit companies to make initial public offerings (IPOs). Both these decisions seem specifically geared to pave the way for the public offering of Reliance Power Limited (RPL).

In fact, SEBI had tried to include these changes as a part of the October board meeting, which was to discuss the Participatory Notes (PN). At that time, the SEBI board had asked that the proposals be deferred to the next meeting. So SEBI officials decided to convene another meeting in a record hurry. This is probably the first time that two board meetings of the regulatory body have been held in a period of three weeks. Extraordinarily, market sources seemed to believe that the RPL issue would also be cleared by the SEBI board. Initially, one dismissed these as nonsensical talk, but apparently the rumour mills were better informed. SEBI did try to persuade the board to clear the RPL issue as well, but was firmly told by the representative of the Ministry of Corporate Affairs, that there should be no rush to clear an IPO before clearing the policy changes.

Anyone who has followed the twists and turns of the face value issue knows that it had been debated for a decade before the first change in 1999. This issue cannot be decided in a hurry; yet, the regulator obtained a quick green signal from the primary market advisory committee and was rushing the changes through the board without a public discussion that is now supposed to be the norm. Why the haste?

Those who have followed the RPL draft red herring prospectus also know that the company has sought a face value of Rs two per share even though SEBI norms currently do not allow a face value of less then Rs10 for companies that plan to price their IPO below Rs500. On the face of it, the decision to reduce the face value of all shares to one rupee appears simple and transparent. But if it were so easy, why hasn't this guideline been amended earlier? One reason was the opposition from corporate India.


Face Value Quandary 


On 14th November, The Economic Times helpfully reported a key item on SEBI's board agenda. It said, SEBI planned to amend the Disclosure & Investor Protection (DIP) guidelines to force a uniform face value of one rupee for shares of all listed companies. What does this move imply? In June 1999, SEBI amended its guidelines to allow companies to choose the face value of their shares. Until then, a 1983 guideline required the face value to be standardised at Rs10 (some older listed companies retained it at Rs100). The decision followed a decade-long debate where leading investment bankers insisted that India must get away from the concept of a fixed face value. But the idea was to abolish the face value so that the capital of a company is merged with the share premium account and the declaration of dividend per share provides a much clearer picture of corporate performance. It was argued that the practice of declaring a percentage dividend based on a low face value is misleading, especially when investors pay a hefty premium on the face value.

Instead of pushing for abolition of face value through the Companies Act, SEBI created a further mess in 1999 by permitting companies to choose any face value so long as the shares were dematerialised. The IT companies immediately took advantage of this by offering seemingly fair-priced shares and offloading just 10% of their equity through another concession. Many companies confused investors by ramping up their shares and then splitting the face value. Share prices often rose substantially after a split. The situation is identical today, with many companies trading at ridiculous prices and the market soaring in anticipation of the reduction in face value to one rupee. Reducing the face value to one rupee is a second-rate solution. The regulator must abolish the concept of face value altogether.


Corporate Objections


Why had companies opposed the reduction in face value to one rupee? Their argument was that investors tend to create multiple folios thereby increasing the cost of servicing shareholders. Many companies came up with examples of how the ability to buy one share was already raising costs-add to this a face value of one rupee and there will be a servicing nightmare. In a paperless system, we are not sure whether this argument is entirely valid. But corporate India has always been powerful enough to catch the regulator's attention. Didn't SEBI itself permit companies to send abridged annual reports to investors, without putting in place a statutory e-filing and reporting system, to help them reduce investor servicing costs? In any case, by May 2004, the regulator stopped companies from splitting their shares before IPOs if the offer price was below Rs500. That suggestion had come from the secondary market advisory committee. This time, however, SEBI got a decision from the primary market advisory committee to rush through its face value reduction plan.


Who Is Manipulating?


The capital market is now in dangerous territory and many large investors believe that upward bursts as well as troughs smack of desperate manipulation by over-leveraged investors. There is also a serious concern about the quality of money flowing into the market. In the last fortnight, our attempts to get to the bottom of this endless rush of money willing to bet on stratospheric share prices has suggested a mélange of divergent interests. For instance, The Times of India quoting gangster Chhota Rajan tells us that Dawood Ibrahim's money is flowing into the market in a big way. Well, Chhota Rajan is in credible company - after all, the National Security Advisor, M.K. Narayan said much the same, last year, but without naming any particular gangster group.


The Diwali weekend brought the revelation that a political party, led by an extremely market savvy leader, routinely gives stock tips to party workers and even advises them when to exit the stock. A lowly foot-soldier mentions several hot stocks where these inside tips allowed him to enter at the very beginning of a major upward movement and book handsome profits. The politician-trader nexus is not new. What is different this time is that stock bets are now a mode of remuneration. A bank chairman gave us another surprise. He suspects that several companies who have been borrowing from banks are diverting funds to the stock market, but it is difficult to catch them at it. Another banker tells us that the Reserve Bank of India too is aware of such diversion of funds. Six months ago, it specifically asked banks to check on the borrowings of a particular high- profile group after discovering that these borrowings were being consolidated into a single finance company and then funnelled into the market through one bank.

Again, this was exactly what Ketan Parekh was doing through Global Trust Bank, in cahoots with several of his corporate cronies. A former regulator has another insight. He points out that foreign direct investment (FDI) will be the equivalent of the overseas corporate bodies (OCBs) of the previous scam. Nobody has any record of the end-use of funds coming in as FDI. In the absence of any monitoring, chunks of this money are finding their way into the capital market in the expectation of being doubled and trebled before they are needed for construction or land acquisition. Every one of these facts signals a bubble which is growing so fast that it could burst anytime. But, as in 1992 and 2000, the government as well as the regulators are either clueless or complacent.




-- Sucheta Dalal