The Hindu Business Line : Revising the IPO norms

THE DECISION OF the Securities and Exchange Board of India to eliminate discretionary allotments to qualified institutional buyers (QIBs) in initial public offerings is an attempt to place an unnecessary fetter on the company issuing capital. Discretionary allotments have allowed investment bankers to place equity with institutions that have a pedigree and an investment horizon appropriate for the long-term interest of the company. This practice cannot be deemed as a `negative' for shareholders. It is also at the core of SEBI's requirement that at least 50 per cent of shares in a book-built offer be reserved for institutional investors. Investment bankers too have an interest in placing the equity with institutional investors in a manner that protects the interests of the issuer and ensures a healthy after-market for the shares. Surely the investment banker would consult the issuer of capital on the choice of institutional investors as, after all, the presence of investors with a short horizon cannot be in the interest of the company or the retail investors.

This allotment process has led to a more realistic pricing of offers, even if one allows for higher premiums when the equity market is in a protracted bullish phase. But in withdrawing this, it is not clear what problem SEBI is seeking to address. If there is widespread abuse of this provision, SEBI has not provided any evidence. To ensure that only serious bidders participate, SEBI could consider prescribing a higher upfront payment than the 10 per cent it has mandated. The 10 per cent requirement is unlikely to serve any purpose and anyway there is no reason why institutional investors should have a concession compared to others. By requiring full payment at the time of bidding, subscriptions may reflect a more accurate picture of demand; this would also be healthy for the book-building offers and the after-market in these shares.

The reservation of 5 per cent for domestic mutual funds in IPOs appears unnecessary, as they have shown the savvy to capitalise on IPO opportunities by competing with foreign investors. However, the requirement that all listed firms have at least a 25 per cent public shareholding is welcome as it will improve liquidity and price discovery, besides enhancing the depth and attractiveness of the market. It will also ensure that stocks with low floats do not trade at substantial premium to peers due to the scarcity factor, and that there is no bunching of IPOs. Yet this stipulation will place several MNCs in a quandary. Many multinationals have embarked on a delisting process, but made little headway as the reverse book-building offer leaves scope for bids at outlandish prices that defeat the very purpose of the exercise; a few investors manage to hold a company to ransom with exorbitant bids. SEBI must provide an exit route to listed companies, at prices that would be fair to them and the shareholders.

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