The Hindu Business Line : Book-building, not the best bet

FOR HAVING BROUGHT in more money than budgeted, the divestment of the Government stake in six blue-chip public sector units must be reckoned a success. More so, because the issues were bunched together and the amount mopped up was by far the highest in any year. Yet from a retail investor standpoint, questions must be raised on the appropriateness of the method used — the book-building route. Sharply in contrast to the more traditional fixed price issue method, this route is supposed to lead to better price discovery, estimation of demand and in cost savings. (The processing of applications can be done faster as indeed it was.)

While capital market data have not conclusively established the superiority of either method, will the just completed six divestment issues yield more convincing results? One has to await a more detailed analysis of subscriber profile and allotments patterns, but even at the pre-issue stages, individual investors had a few grievances against the 100 per cent book-building method. The mechanics of book-building have been such that the entire IPO exercise seemed far removed from investor perspective. The announcement of price bands just a day before the commencement of book-building created confusion. There were complaints of issue material being both scarce and inaccessible. The break up of the subscription list for the ONGC mega issue bears out what everyone suspected: Retail investors were far less enthusiastic than the qualified institutional buyers (QIBs). As a category, the former contributed to 17.8 per cent of the 25 per cent reserved for it whereas the QIBs' subscription was 13 times the issue size. A few other factors — notably the bunching of these equally good issues — may have inhibited individual investors, but there are reasons to think that the 100 per cent reliance on the book-building route was a principal cause.

Even as some of the other pitfalls of the book-building route are coming to light — in the ONGC issue there are complaints that allotments under the oversubscribed QIB category are being made in an opaque manner — it is perhaps wise to think of a via media that would marry the perceived advantages of both the fixed price issue method and the 100 per cent book-building route. In the former, the issue is usually underwritten, the price fixed in advance and, therefore, one can expect the offer price to be conservative and investor-friendly. There is generally an oversubscription and a high probability of the market price rising post-allotment. Under the book-building method, in contrast, the bids ensure that the offer price is close to what the market can bear.

Socompared to the fixed price method, book-building results in a more aggressive price. Further, as all bids above the cut-off are allotted shares, there is no unsatisfied demand for the shares sold through book-building in the post-allotment period. For these reasons the fixed price issue method is said to favour the investor, and book-building the issuer. In the latest six issues, the Government, no doubt, had strong reasons to opt exclusively for book-building. However, assuming that in future IPOs it has a more relaxed time frame, it might be sensible to have 75 per cent of the issue book-built and the balance offered to investors at a fixed price.

More Stories on : Editorial | Disinvestment

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Book-building, not the best bet

High oil prices would hit Indian economy

The poll cauldron

A case of two views and no penalty

In the `interest' of justice

Points to care if you have money to spare

Miles to go and promises to keep

`Caves' and `shrines' are not buildings but plant!

Exclusive Marketing Rights — A monopoly without a right?

A solvent country can have an insolvent government