The Hindu Business Line : Management control systems — To stop `muddles' from becoming `meddles'

The share market intermediaries, coming out of an unduly long hibernation, find themselves unable to shake off the sleep. In all these, one casualty is certain — investor confidence.

An analysis of the nature of slippages occurring point to the absence of good management control systems within the market intermediaries such as registrars and merchant bankers.

A good management control system identifies critical variables, sets up standards for performance, enables measurement of actuals and assesses the reasons for deviations and suggests framework for remedial action.

In the ONGC episode, the basis of allotment was not tied to the actual allotment of shares. High net worth individuals were treated on a par with retail investors who were promised 100 per cent allotment. As a result, some HNI investors received full allotment to their surprise and, by the same token, some did not get any.

The heat really turned on when the HNIs who were "over-allotted" started selling their shares. Appalled by the slip, MCS pulled the plug by alerting exchanges not to trade in the shares, and the market reacted the only way it would: With shock.

Share prices plummeted to a low of Rs 780 and recovered only when it was understood that the real dimensions were not as bad as was projected.

The panic, in retrospect, was totally disproportionate to the event — the fiasco pertained only to a miniscule percentage of shares stated as `oversold'.

An analysis of the failure points to inadequate supervisory mechanisms and audit procedures of the registrar.

A sound management control system identifies what variables are critical and provides at higher levels of hierarchy, a system of counter-checks.

"Errors in allotment" is one such, since small or big, the resulting damage-control exercise can be very `expensive'.

One of the significant causes for the happening was stated to be the "largeness of the issue". The larger the issue size, the greater the role of planning and control systems.

Historically, the same MCS handled the Mangalore Refinery and Petrochemical issue, one of the biggest issues till date with over 40 lakh applications, without any problem.

The reaction of MCS was a typical knee-jerk one. It asked for a co-registrar to the ICICI Bank issue that followed and if there be no co-registrar, ICICI Bank should appoint another registrar.

What, one may ask, is assured by a co-registrar? Does it give a foolproof solution to such a happening? If the error was human, could it still not repeat?

At most, the noose would have tightened around two necks instead of one (and a possible pitched battle between the two inter-se). Or, could it be that two hands are better than one for such volumes? Why was this not deliberated upon earlier?

Close on the heels of this blunder, investor confidence took another beating when the IT Department shot off missives to high net worth individuals asking for their source of income for the funds invested.

Whether there is protection for the small investor or not, there is certainly harassment for the big. For a market that was bouncing back, this could not have been more ill-timed. What differentiates `muddle' from `meddle' is transparency. A good manage- ment control system would mitigate the probability of occurrence of the muddle.

But, if `muddle' it does, then the speed of response is critical. Otherwise, the muddle will start degenerating into a `meddle'. Muddles affect only the short-term investor confidence, whereas meddles affect the long-term.

In the case of Power Trading Corporation, the listing of shares, which was slated for March 29, was delayed thrice till April 7.

Consider this: On the first day itself, shares twice the issue size were traded. Little wonder this delay in listing irked investors both small and big. This is yet another pointer to inadequate management control systems. Middlemen need to roll up their sleeves for sure.

The ONGC episode, considering the speed with which the error was detected and depository accounts frozen, appears only a muddle. A good management control system would have mitigated the probability of occurrence of the muddle. Recently, merchant bankers decided to form a "core committee" to fix definitive responsibilities for each intermediary in a public issue.

Without doubt, the committee will seek to save the skin of merchant bankers saying that they can play the role of a coordinator and not take responsibility for mishaps.

But, hopefully, the committee will produce a document spelling out the checks and controls, which if given to an intermediary with a good management control system, will give investors something to cheer about.

(The author, a director in DMS Financial Services Pvt Ltd, is a visiting faculty at IIMs. The views are personal. He can be contacted at suresh@dms-finance.com)

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