The Hindu Business Line : An exercise in rubberstamping?

PUBLIC issues through the 100 per cent book-building route have almost become de rigueur now. Price discovery is touted as the main plank of the book-building mechanism. But where is the price discovery when the bidders are called upon to bid within a limited range as is happening under the current regime? The setting of the floor and ceiling prices in fact presents the bidders with a fait accompli.

Suppose a company invites bids for its shares of Rs 4 par value within the price band of Rs 63 to Rs 67, it is effectively telling the world that it will not settle for anything less than Rs 59 per share as premium. And simultaneously it also tells that it will not accept anything more than Rs 63 per share as premium. In the event, the bidders' role is only to provide inputs to enable the company zero in on the offer price within this limited range.

The transparency of the entire process is confined to the quantum of minimum and maximum premium, whereas transparency is needed elsewhere — how was the minimum and the maximum price discovered. To be sure, the red-herring prospectus, which appellation incidentally is wickedly appropriate, does mention the management's justification for the premium. But if the company in league with the merchant banker is going to decide the price band, the bidders have only a tangential and subsidiary role in the price discovery process. So much so, far from being a price discovery mechanism, the extant book-building mechanism is nothing but an exercise in rubberstamping the management decision in this regard.

Google Inc of the US is all set to make its IPO through auction route for the first time. While the details of this process are not known, one assumes that it will have all the trappings of the book-building exercise sans the prescription of price band. This is as it should be. Prescription of the price band not only reduces the price discovery process to a farce but also misleads the bidders into believing that there is something sacrosanct about it.

Incidentally, one is unable to understand the rationale underpinning the maximum price. One can understand prescription of floor. But prescription of ceiling defies logic given the fact that no one is going to say `no' to offer of a higher price than what one is deemed to be deserving of. The raison d`etre of an auction is to realise the highest price possible. Why then spurn the potential offer of the extra price?

The extant regime suffers from another drawback — it restricts the bidding process only to qualified institutional investors and high net-worth individuals with a small reservation for small investors.

Evidently, this is to protect the small investor from the downside of the primary market. But it also allows an esoteric set of investors to skim the cream in the secondary market. There is no reason why the whole exercise should not be democratised. Equity is not for the faint-hearted. If a small investor wants to stick his neck out, let him. As it is, even in a 100 per cent book-building exercise, a small portion is reserved for the small investor. Let us then drop all pretence of protecting him.

(The author is a Delhi-based chartered accountant.)

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