Financial Daily from THE HINDU group of publications
Tuesday, Feb 28, 2006
Financial Daily from THE HINDU group of publications Tuesday, Feb 28, 2006 |
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Economic Survey Markets - IPOs Survey moots changes in IPO pricing system — Suggests shift to a `pure auction' method Our Bureau
New Delhi , Feb. 27 The Economic Survey has mooted a `pure auction' system for price discovery in initial public offerings (IPOs) instead of the present book-building process that requires a price band to be fixed by the merchant bankers to the issue. Market analysts believe that the proposed system of pure auction could result in the bad deal for retail investors who might be elbowed out of the entire IPO market. Thus, it might also signal an end to the existing quota-based allocations for retail investors in IPOs. The need for moving away from a quota system to a non-discretionary price discovery through a unified auction system has been emphasised in the wake of recent events that revealed individual investors placing multiple bids in the IPO auctions, in order to benefit from the quota made available to individual investors.
To check multiple bids
The problem of multiple bids by individuals seeking to profit from the quota for retail investors at the discretion of merchant bankers or Government could be removed by considering a pure auction for price discovery at the IPO, in much the same manner as the secondary market functions, the Survey has said. This is one of the improvements mooted for the securities market architecture.
No quota to retail investors?
Reacting to this suggestion of having a pure auction system for price discovery at IPOs, market participants and capital market experts said this clearly signalled that the Government was not keen on continuing with reservations for retail investors in IPOs. "I am comfortable with the proposed pure auction system, because the existing book-building process is not realistic (in price discovery). In pure auction system, the highest bidder takes it all and both the issuer and institutional investors would benefit. "But the entire issue should not be on a pure auction basis. A particular portion should be reserved for small retail investors," Mr Prithvi Haldea of Prime Database told Business Line. He also felt that any system that did not provide reservation for retail investors would be suicidal for the growth of capital market in the country. "By the unified price auction suggestion (reflected in the Survey), it is clear that you are virtually taking a call that retail investors should participate in the capital market through mutual funds", Mr Haldea said. Mr Amul Gogna, Executive Director, ICRA Ltd, said the logistics of the proposed systems was not clear. "The proposed system means that there would not be any price bands and whoever quotes a better price would get the shares. However, the logistics of such a system is not yet clear," Mr Gogna said. Till recently, the capital market regulator has been taking the position that there was no immediate plans to do away with the quota-based allocation for retail investors.
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