Rationalising public issue procedures

The reduction in the period between public issue closure and listing, from 22 to 12 days, and the decision to ask QIBs (qualified institutional buyers) to pay 100 per cent of the application money upfront, as is the case for retail investors, are welcome steps. This level-playing measure will ensure that the demand from QIBs is not inflated, leading to a realistic supply-demand picture.

However, there are several lacunae that need to be addressed. The first is the price band announcement date and the issue opening date, which is two working days in initial public offers (IPOs) and one in follow-on public offers (FPOs).

Further, the abridged prospectus does not have the price band and the minimum lot size, making it difficult to calculate the price to earnings ratios or draw comparisons with peers.

Tackling the grey market
In the absence of this, investors consult brokers, who are generally influenced by the premium quoted in the grey market. Further, unlike the investors in big cities, those in semi-urban and rural areas are not informed about grey market premiums and price bands. This is a major reason why subscription from semi-urban and rural areas is less. Grey market transactions are only void under the bye-laws of stock exchanges. They need to be declared illegal under the Securities Contracts (Regulation) Act, 1957. Once transactions are rendered illegal, stringent penal action must follow against the culprits. If this is not possible, the only other way out is to regularise these transactions, as has been done by the New York Stock Exchange.

Declare price band earlier
The price band should be known prior to the publication of the abridged prospectus. The abridged prospectus with this information must be made available to investors at least ten working days before the issue opens. Besides, the announcement in newspapers related to opening of IPOs needs to be made at least seven working days before the date the issue opens and not just three or four days, as is done by most companies.

Extra time for retail investors
To attract retail individual investors (RIIs), QIBs and high net worth individuals (HNIs) should be given at least three working days after the closure of the issue. Retail investors will then be able to assess the demand for the issue from QIBs and HNIs, which will enable them to take a more realistic view of the prospects of the issue. There need be no apprehension of ruling prices related to the FPO being beaten down as RIIs lack the financial muscle to do so.

Other changes
A summary of the basis on which the issue price was arrived at needs be given in the announcement, as was recently done by a few companies like Tarapur Transformers and JSW Energy. This will help ordinary investors make a quick assessment of the merits of the issue.

The rank of the IPO grading by credit rating agencies is given in a remote corner of the abridged prospectus. In order that the eye of the investor catches it easily, it should be given in bold letters, not only on the first page of the abridged prospectus but also displayed prominently in the application form itself.

Let us not forget that the only effective way to strengthen the retail investor population in India is to rationalise the procedure for subscription in the new issues market, as new investors test the primary market before venturing into the secondary market.

The author is former executive director, Bombay Stock Exchange