The Hindu Business Line : QIP and the theory of trickle-down

The view that the primary market should be out of bounds for the retail investors and flung open only to QIBs has been doing the rounds for quite some time now.

The Securities and Exchange Board of India (SEBI) recently permitted listed companies satisfying the prescribed norms meet their growing appetite for capital within the country — and not scout for it outside by issuing GDRs and ADRs — by allowing them to make private placement to QIBs (Qualified Institutional Buyers) in the form of QIPs (Qualified Institutional Placements) within the country. Of course, a special resolution in terms of Section 81(1A) would be necessary for making such private placement, which requirement has incidentally never seriously challenged anyone in the Indian corporate sector much less grounded any proposal.

Be that as it may, SEBI apprehends that the capital market is getting exported when a GDR or ADR issue is made. And it is with an avowed view to arresting this proclivity that it has come out with a circular allowing private placement to QIBs.

The process of issue of GDRs/ADRs is much quicker vis-à-vis a domestic issue and, hence, the preference for the former. This preference would go away once speed is made available, so to speak, is SEBI's refrain.

Unfounded fear

This belief seems misplaced. For, GDRs and ADRs are not issued only to beat time. They serve more profound purposes. First, they allow companies to access hard currency given the fact that ADRs and GDRs are denominated in US dollars. And, second, they are often issued at a premium to the prevailing quotations in the Indian bourses.

Moreover, the fear of capital market being exported is quite unfounded, if not chimerical, given the two-way fungibility of these instruments. The bottomline is the primary market has now become `of the QIBs, for the QIBs and by the QIBs'. This would be evident if one notes the fact that as much as 65 per cent of any initial public issue is reserved for institutional investors and high-net-worth individuals. What SEBI now wants is that even follow-up issues should bypass the public. Implicit in this new order is SEBI's worldview that retail investors' appetite for equity should be largely fulfilled at the secondary market unless mutual funds come up in a big way with schemes focusing on IPOs and FPOs (Follow-on Public Offers). This not only turns the conventional wisdom that small investors should hone their skills in the primary market rather in the secondary market on its head, but is of a piece with the obnoxious trickle-down theory which gung-ho capitalists unabashedly advocate. The trickle-down theory condescends to leave crumbs for the not-so-well-heeled.

Bias towards the rich

It is premised on the invidious notion that there is nothing wrong in cosseting the rich given the fact that the huge consumption by them thus engendered would trickle down to the poorer strata of the society over time. Prof J. K. Galbraith, who was also famous for his one-liners including "India is a functional anarchy", rubbished and debunked the theory as the equivalent of overfeeding a horse with oats so sparrows could feed themselves on the undigested oats spilling into the horse's excreta.

The view that the primary market should be out of bounds for the retail investors and flung open only to QIBs has been doing the rounds for quite some time now. Such discrimination in favour of QIBs is sought to be rationalised in the name of protecting retail investors from the vagaries of the primary market.

The suggestion, disingenuous as it is, glosses over the more practical ways of securing the interests of the retail investors — offer of safety net and reining in on unbridled premium to name just two — the same way the trickle-down theory does at a broader level.

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

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