Sunil Jain: Getting your rights, publicly

Sebi must act quickly to fix the issues in primary markets

Now that the stock markets are picking up, India Inc is rushing to mop it up. Over just the last two months, firms have raised nearly Rs 5,000 crore and another 10 have announced plans to raise another Rs 20,000 crore from what are called Qualified Institutional Placements — considering just Rs 188 crore was raised in all of last year from QIPs, that’s a huge plus. But why are there no IPOs, no FPOs or even rights issues — after all, these are what individuals like you and I subscribe to. That the last major IPO — of Reliance Power in January 2008 — managed to get 46 lakh investors to put in Rs 39,900 crore in just four days, would suggest the retail market has great depth and interest.

The reason there are no rights/IPOs/FPOs is actually quite simple: The rules are biased against them, and Sebi is taking far too long to do anything about this. On average, preparing the offer document and getting it vetted by Sebi can take around four-five months — in a market that’s so volatile, this is grossly unfair to the issuers. When Tata Motors came out with a Rs 1,960 crore public offer on September 29, this was at a discount of 36 per cent to the market price, making it almost certain it would be over-subscribed — by the time, the issue closed on October 20, the price was 20 per cent higher, making sure that no one wanted to buy it. In the case of Hindalco’s Rs 5,047 crore issue, the 18 days the issue was open saw the discount-to-market price of 26 per cent change to a premium of 16 per cent. Naturally both issues bombed.

But what is Sebi doing vetting the issues anyway, since pricing is decided by merchant bankers? Looking for wrong information put out in the prospectus? Well, why not just hold the merchant banker responsible for the veracity of all information put out? In any case, after Sebi vets the prospectus, it says “the Equity Shares offered in the Issue have not been recommended or approved by SEBI, nor does SEBI guarantee the accuracy or adequacy of this Prospectus”!

In the case of rights issues, there is even less reason for Sebi to examine anything or to ask firms to issue detailed offer documents considering those subscribing are existing shareholders of the firm to whom disclosures get made all the time. If need be, the regular disclosure needs can be upgraded. Indeed, the rules on rights issues are so archaic, you can’t even buy the rights shares electronically — you can electronically buy shares in the secondary market but you can’t subscribe to rights issues in the same manner. So, a firm first spends months in making the offer document and getting it approved, it then keeps the issue open for 15 to 30 days by which time, if the price in the market dips, the issue’s prospects are over — since a QIP can be done in days, none of these issues affect it.

For IPOs, Sebi needs to re-look pricing which, by the way, ties in with the IPO scam that has got CB Bhave all in knots. The IPO scam, where Roopalben and company made a fortune by coming up with fake depository accounts, was directly related to one thing: That, in a bull market, IPOs tend to list at a higher price than they are issued at — a friend made good money blindly applying for all IPOs and selling on listing, never mind what the IPOs were! This happens because, right now, IPOs have a pre-determined issuer-fixed price band and bids are invited only within this from QIBs/HNIs/individuals. When all bids are in, the merchant banker chooses one clearing price, for all segments of buyers, and then allots shares on a pro-rata basis. This is the main reason why prices shoot up on listing — a QIB who wants 50,000 shares but gets only 5,000, now places an order for another 45,000. A better idea would be to have no price band, reserve a third or so of the issue for QIBs, who are supposed to be experts, and sell at the highest prices that clear the market — that way, there’s no pent-up QIB demand and so prices are unlikely to shoot up on listing. Then fix the price for the retail investor at the average of all QIBs or the lowest, and then do proportionate allotment to them.

Unless Sebi takes quick action on these fronts, it is unlikely India Inc will see a healthy sustainable primary market — and you and I may not be able to buy any primary shares in the near future.