S Murlidharan: IPO reforms are key to reining in greed
While secondary market practices have improved in India, a minimum dividend on equity will put an end to the rapacious premia charged in the primary market
From the days of dirigisme, when the Controller of Capital Issues condescended to allow a small premium grudgingly on the face value of shares on offer, we had long ago swung to the other extreme — free pricing under the 100 per cent book building norm, which almost every company making an IPO or offering shares plumps for. Though book building is touted to be a price discovery process, the truth is that Qualified Institutional Buyers (QIBs) participating in the exercise are presented with a fait accompli, which is what asking them to discover the price within a narrow band of say Rs 400 to Rs 450 amounts to. With the floor being set and the ceiling pretty close to the floor, there is very little room for price discovery. Reliance Power’s IPO two years ago was priced rather ambitiously and when listing losses stared investors in the face, the company brazened it out with the chutzpah that the undivided Reliance group was famous for — issuance of 2:5 bonus shares back-to-back with the allotment.
The company actually gave bonus shares to the shareholders out of the share premium it had just collected in the IPO. Verily, it was a throwback to the stunning feat RIL had pulled off more than three decades ago —conversion of non-convertible debentures into equity shares — though it admittedly was not in violation of any law inasmuch as the company law allows a company to issue bonus shares from the securities premium account, period. It must however be conceded that Reliance Power had the decency to be contrite and offer some reparation to the shareholders who had reposed faith with it when the general refrain all along has been to be blasé about the whole thing on the philosophical and self-serving rationalisation that investment in equity is fraught with risks.
The Indian stock market, with its transparent screen-based trading and orderly settlement, is the envy of even the advanced countries and bourses, even though the bulk trading platform is a definite eyesore, offering as it does what is arguably a public platform for consummation of what are admittedly private deals like family settlements and disentangling of cross-holdings. Be that as it may, the point is while we have travelled a long way in improving tremendously the secondary market practices, a lot needs to be done in the primary market. Here are some suggestions:
- The Dutch auction system must yield to the French auction system. The Dutch system erects a low ceiling besides allotting shares to everyone participating in the book-building exercise at the cut-off price, whereas under the French system, with there being no ceiling, one gets allotment precisely at the price he had bid. To wit, if A bids for two lakh shares at Rs 500 each whereas B bids for five lakh shares at Rs 400 each, they would get their allotments at Rs 500 each and Rs 400 each respectively. This is as it should be. Only retail investors should be allotted at the cut-off price. In the above example if C bids for three lakh shares at Rs 300 each, the cut-off price would be Rs 300, assuming the QIB quota is 10 lakh shares. Bidding would be more restrained and dispassionate and not gung ho in the sobering knowledge that, otherwise, one has to stew in his own juice.
- In accordance with Sebi’s Investor Protection Guidelines, at present there is an optional regime of safety net. This must be made mandatory. Promoters and merchant bankers would scale down their vaulting ambitions in the face of the grim prospect of having to buy out the small investors at the offer price in case the market price dips below the offer price within six months. In fact, a safety net any day is infinitely better than the inane Green Shoe Option, which at best could stabilise the market price for shares during the initial 30 days from listing, whereas small investors need something less ephemeral and more solid.
- The company law should mandate a minimum dividend on equity. This might sound bizarre to the purist and prudish. They might bristle at the very mention of this suggestion, because it goes against the hoary and pristine concept of equity. But when everything else under the sun comes for intense scrutiny and challenge, equity cannot remain impervious to challenges and changes, especially when there is a distinct separation of management and capital these days. Suppliers of equity should be perceived as purveyors of funds, period, and not as owners of the company. To be sure, this might appear to be blurring the difference between bonds and equity shares. But if all other features of equity — lack of security, last priority in the matter of reward and return of capital on winding up and lack of redemption — are retained, equity would remain as distinct from bonds as cheese from chalk.
The point is there must be some mandatory and minimum user charge levied on companies for using shareholders’ money. The constant refrain of market fundamentalists that shareholders must collect their reward from the market sounds hollow and specious. To be sure, the larger and ultimate reward for shareholders lies in the market but this cannot be a self-serving excuse for not paying for the use of capital. When user charges are levied, one tends to be economical with use of the resources. Company promoters would not be blasé about premium in such an event. Let the minimum dividend by all means be the savings bank rate of interest. It would be a sufficient deterrent against mind boggling premium in general and premium particularly by companies whose products are not even on the drawing board, much less have rolled out.
Implementation of all the three suggestions might be in order because they are not mutually exclusive or incompatible with each other. But if for some reasons the government is shy of the first two, implementation of the third — minimum dividend — would halt the rapaciousness in the matter of premium in the primary market. Each time there is a successful public issue either on the back of reasonable pricing or buoyancy of the secondary market or both, there is childish and premature exultation that retail investors would return to the primary markets in droves. Such mushy utterances have been in the air in the aftermath of the Coal India disinvestment. What is needed however is ‘root and branch’ reform in the primary market that reins in cupidity. That of course should not even envisage a return to dirigisme.
The author is a chartered accountant