The Hindu Business Line : Redefine IPO share allotment process, says Geojit MD

The initial public offering processes should be reformed and reworked and the share allotment procedure should be redefined to lure retail investors back to the equity markets, according to Mr C.J. George, Managing Director, Geojit Financial Services Ltd, Kochi.

While he does not favour a return to the old days when the office of the Controller of Capital Issues had a decisive say in the pricing of new equity offerings, he prefers some mechanism that will ensure a fair price fixation for new issues so that the interests of the long-term investors are protected.

In an interview to Business Line here, he said though the NSDL/CDSL figures might show that the number of demat account holders to be around 7 million, this could be because of multiple accounts in a family and the actual number of direct equity investors might be just around 3 million. This showed that the number of investors was only a fraction of the population and there was a huge untapped potential.

He said during the 1980s and early 90s, a lot of new investors entered the equity market. But after 1995, new investors "lost confidence in equity markets." The IPO market was the route through which new investors generally entered the stock market and that was "not happening". The stock market reforms have not satisfied them (the new investors). Mr George said the IPO market should be "reformed" in India, the processes should be reworked and the share allotment process has to be "redefined", giving greater importance to retail investors. He said if necessary, there should be a re-look at the pricing of IPOs. It was not necessary to simply copy the practice in countries like the US.

He said in a market that was not developed, we do not need extremely sophisticated systems as used in the US or in the West. What we need is a medium through which we could attract a large number of equity investors and there should be some regulation to protect the small investors' interests.

He said the long-term danger was that the equity market in India would be controlled by FIIs. The Government, the investment bankers and the financial intermediaries like Geojit should work towards developing a large investor population to serve as a balancing force. It was estimated that 74 per cent of the floating stock of the BSE Sensex shares was held by FIIs. It was in the "country's interest' that we need a very vibrant domestic equity investor population, he said.

He said there should be some change in the share allotment process at the time of IPOs. Today, this was biased in favour of institutions. The new issue application procedures should be simplified. As the entire data regarding an investor is available with the DPs, it would be far easier to apply in the IPOs through the DP accounts. But the current application procedures pose a lot of hurdles to new investors.

Mr George, on the issue of fair pricing of new issues, said India could follow the example of Taiwan, where companies that are coming to the market for the first time with IPOs are made to list the shares in the emerging market segment. This would provide an opportunity for potential investors to know about the companies' performance before the shares are moved to the regular market segment. This also would ensure that the pricing of IPOs of first timers was not inflated since emerging market listings would not command a huge premium. He said the experience of IPO listing in a bull market could not be used as an example.

Commenting on the interest shown by investors in countries like Japan in the Indian markets, he said globally, investment opportunities now are much less than a decade ago. India and China were the two preferred investment destinations and India held an advantage because of its democratic and legal systems.

He was confident that the liquidity driven demand for equity in India would continue for another two years, particularly as the benefit of investments made by corporate India would be reflected in the coming quarters.

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