The Hindu Business Line : No small subterfuge

THE SECURITIES AND Exchange Board of India has quite rightly raised doubts about the integrity of the allotment of shares under the `retail' segment by Yes Bank from its Initial Public Offer (IPO) in July. The regulator cannot be faulted for terming the whole process as subverted, contending rightly that a retail investor could not possibly have been able to identify over 6,000 people of similar profile holding shares in the bank, much less wanting to exit from them at the time, and all of that being accomplished even before the stock got listed on the stock exchanges.

Throwing further doubts about the transaction is the fact that all these 6,000-odd investors happen to have the same address as that of the central figure of the plot and the ease with which institutional investors for such a huge block of shares were identified for purchase, resulting in a handsome profit for the protagonist. Clearly, the whole arrangement was either a charade or the person in question has sufficient professional expertise as to be at least excluded from being labelled a `retail' investor and eligible to preferential treatment in the allotment process. Much the same can be said of the other clutch of transactions that SEBI investigated. But it is one thing to sketch out what might have happened and quite another to establish it beyond a shadow of doubt under a due legal process. Clearly, SEBI will have a battle on its hand in making its charge of supervisory laxity against market intermediaries and banks stick.

Of course, none of this need have happened had the bank got its pricing right as without the perception of under-pricing there would have been no incentive for institutional or high-net-worth investors to smuggle their applications through the retail route. But this is not something that should worry the market regulator. It is for the issuer company to evaluate merchant bankers offering to place its shares on the basis of price and ability to make a market in the stock after issue. If it made a bad choice, then it is a matter between the company's management and its shareholders. But the issue has opened up the whole question of reservation of shares for retail investors and high net worth individuals in primary offerings.

There may have been a case for such a reservation in the initial years of India liberalising its capital market and the equity culture still taking root among retail investor segment. But the market has acquired considerable sophistication, if the phenomenon of on-line trading by retail investors is anything to go by. Let investors, therefore, bid for shares on the strength of their view of the intrinsic worth and if that turns out lower than the collective perception of the market, they must accept philosophically that there would be other investment opportunities. It is worth remembering that when a company is forced to under-price its equity because of the principle of reservation, then it does hurt the property interests of incumbent shareholders, some of whom may well have small holdings.