Sucheta Dalal :IPOs and Special Concessions
Sucheta Dalal

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IPOs and Special Concessions  

April 8, 2008

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


IPOs and Special Concessions


The Securities and Exchange Board of India (SEBI) is again set to tweak the rules regarding the ‘face value’ of equity shares - mainly to correct a special favour shown to the issue of Purvankara and to help promoters such as Reliance Power and maybe even the Bombay Stock Exchange (BSE). The rules currently state that an unlisted company planning an initial public offering (IPO) can have a face value below Rs10 only if the issue price is Rs500 or more. Now, SEBI wants to scrap this restriction. Sources say that the move is projected as one that will allow larger public participation in the IPOs of entities such as the BSE. But it could well be a way of covering up the special concession SEBI has shown to a company called Purvankara Projects.

This realty company’s initial attempt to raise Rs1,127 crore at the end of July had flopped due to its over-ambitious price band of Rs500-Rs525 for a face value of Rs5. The Bangalore-based firm was allowed by SEBI to reset the price-band to Rs400-Rs450 and extend the date to 8 August 2007. It finally scraped through with a subscription at the lower end of the price brand. Did SEBI miss the fact that it had permitted the face value to remain Rs5, in direct contravention of its rules? Certainly not. In fact, the investment banking community was abuzz about the special concession for the Purvankara issue. Is it any wonder that the regulator is in a hurry to change the rules? A proposal to this effect was part of the agenda for the much-watched board meeting of 25th October but was not discussed that day.

The savvy Anil Dhirubhai Ambani Group (ADAG), which is fully aware of the situation, has quickly made an attempt to go through the door that SEBI has opened specially for Purvankara Projects. The red herring prospectus of Reliance Power Limited, which has re-ignited the war between the Ambani siblings, has proposed a face value of Rs2 per share at a price below Rs500. Since Reliance Power is unlikely to take a rejection without protest, it is another reason why SEBI is keen on changing the rules



Still Clueless


The drama over curbing Participatory Notes (PNs), the knee-jerk market reactions, the panic-stricken clarifications by the regulator and the finance ministry are all over and the Sensex has been comfortably nudging 20K as we move towards the close of the Samvat year. Has any of it led to greater transparency about foreign investment or shareholding? Not a bit. In the 18 months when PNs are finally rolled over, we could well have a different set of people heading the regulatory body; and if the past is an indicator of the future, it will lead to new ideas about regulation.

Instead of focusing on the future, shouldn’t the SEBI chairman push for increased transparency right away? Several top corporate houses dislike the fact that they have no clue about the real beneficial holdings of their shareholders. The shareholders’ list is a bunch of blue chip FIIs. But, everybody in India knows that names such as Union Bank of Switzerland (UBS) or Goldman Sachs or Merrill Lynch provide no indication of the ultimate beneficiary hidden behind multiple layers of investment entities and sub-accounts. The FII holding in several companies could give them controlling power if they got together. FIIs own 63.5% of the shares of Housing Development Finance Corporation, 62.54% of IVRCL Infrastructure, 61.67% of GVK Power, and own between 40%-47% of the equity of ICICI Bank, IDFC, India Bulls, Satyam Computers, Amtek Auto, Phoenix Mills, Jain Irrigation and Rolta. A disclosure-based regime requires that this publicly available information must be classified on the basis of sub-accounts to let in more sunshine on foreign shareholding patterns.


SUTI’s Riches


SUTI or Specified Undertaking-UTI was born out of the split of Unit Trust of India (UTI) after its second debacle in 2001 and was part of a government bailout and restructuring programme. The idea was that SUTI would be wound up after a few years and in any case before 2009. But the unprecedented bull run over the past five years has made SUTI’s holdings of property and stocks extremely valuable; suddenly nobody is in a hurry to shut it down. The SUTI portfolio includes three precious chunks of equity - Axis Bank (22.47% worth Rs7,289 crore), Larsen & Toubro (9.21% worth Rs11,435 crore) and ITC (11.87% worth Rs8,028 crore). Their combined value is a whopping Rs26,715 crore today (26 October 2007) as the Sensex has touched the 20,000 mark.


These shares ought to be sold and the money used for poverty alleviation programmes and infrastructure development. Each of these blue-chip holdings will fetch a significant premium to the market price if sold as a block; and a committee headed by Vinod Rai, former banking secretary, had recommended precisely how to do this, way back in 2005. But instead of selling the shares, the government is offering free custodial service to the management of these three entities.

ITC and L&T are professionally managed companies that want the government to hold a block of shares to avoid a hostile takeover bid. It is no secret that BAT of UK, already the largest shareholder of ITC, would jump at the chance to buy a block of shares that will fetch it management control. Even in L&T, UTI ended up as the white knight during its tussle with the Birla group. The issue with AXIS Bank is very different. Here, it is the government that seems reluctant to let go and make an ‘Offer for Sale’ to the public. Having forced UTI Bank to change its name and build its own brand, why is SUTI holding on to Axis Bank’s shares? One reason is that SUTI does not want to wind up. In fact it has even inducted a finance ministry official on its board in a sure sign that it is looking to perpetuate its existence.


Regulatory Confusion


MMTC has joined hands with the brokerage firm India Bulls to set up a commodity exchange, which is good news for the two companies; but will someone in the government explain the steps taken to sort out a hive of regulatory issues that is bound to crop up after this unusual marriage?

If such a bourse is allowed to be set up by the Forward Markets Commission, then India Bulls, a capital market intermediary, which is subject to two layers of regulation (by SEBI and two stock exchanges) will also be indirectly supervised by two independent regulators who report to two different ministries of the government. Logically, nothing prohibits India Bulls, a private entity, from tying up with anyone for its expansion and diversification; but MMTC as a public sector entity could have sought more clarity.

Confused regulation and lack of clarity over regulatory jurisdiction are serious issues that the government and its regulators are happy to ignore until there is a problem. For instance, SEBI has belatedly woken up to the need to demand separation of activities by the National Securities Depository Limited (NSDL) and has asked it to create a separate business unit to handle the task of record-keeping for the pension regulator. It has also insisted that this entity must have no legal or financial links with NSDL in three years. Ironically, it has thought it fit to create a regulatory framework that will cover all situations of regulatory overlap and consequent confusion. SEBI also seems in no hurry to frame regulations for stock exchanges to go public. Consequently, the IPO plans of MCX and BSE are in limbo. In MCX’s case, there was a formal application that has been languishing for over a year for want of regulatory clarity. This has also affected its growth plans and diluted its competitive strength. The need for regulatory and investment clarity is even greater in the commodity futures market where speculative excesses can anger ordinary people and damage political fortunes.





-- Sucheta Dalal