The Hindu Business Line : Don’t stub out listing gains with a greenshoe

With investors falling over themselves for a share of shares on offer in IPOs, its ripple effects are palpable in the secondary market as well. The QIBs (Qualified Institutional Buyers) who lose out in the book-building sweepstakes often are heard complaining of favouritism or lack of transparency in the inevitable rationing of shares reserved for them.

Incidentally, 50 per cent of the issue is reserved for them, 15 per cent for high net-worth individuals and the remaining 35 per cent is made available to the retail investors. But the disgruntled QIBs don’t throw in the towel.

Instead, they gird their loins to get from the secondary market what was denied to them by the primary market. The upshot — considerable listing gains.

Don’t spoil the party

And this precisely is what beckons the retail investors who hyena-like tail the lion (read QIBs). Their small party should not be spoiled. Which could be if a company uses the greenshoe option as it obtains under the present SEBI regime, which admittedly is also the universal norm.

Greenshoe option consists in a company reserving itself the right to allot a further quantity of shares in case of oversubscription not so much with a view to garnering more funds for the company but as to stabilise the secondary market prices hot on listing as far as possible to the levels of the issue price.

Towards this end, it appoints a stabilising agent (SA) who enters into an agreement with one of the promoters of the company having in his possession sizeable number of shares obtained during the salad days of the company. This cannot be in excess of 15 per cent of the issue size.

After allotment, the company hands over the cash garnered out of such over-allotment to the SA. Now the SA is armed with both cash and shares either or both of which he is supposed to use with discretion during the first thirty days (maximum permitted) following listing.

If the initial quotations are way above the offer price, the SA releases the shares in his kitty to douse the raging fire set by QIBs as well as by others. Should however the secondary market give a cold reception thus pulling down the initial quotations below the offer price, the SA steps in to mop up shares to prop up the price.

Galling prospect

To the retail investor in particular, the prospect of dousing operation by the SA is galling. With no meaningful safety net mechanism in place, he should not be grudged his listing gains. In fact the very mention of greenshoe option in the offer document could well subdue his interest in the IPO.

Having garnered the required funds from the primary market, a company should not lose sleep over higher quotations in the bourses. All that perhaps it can do is to rue its decision at not having set the price band at still higher levels. It should however not spoil the party for investors by denying them the listing gains. At the same time, the mopping-up operation carried out to shore up the sagging valuation in the bourses, ephemeral though it is, nevertheless is commendable.

SEBI should therefore evolve a sui generis version of greenshoe option — one-sided. After all, the regulator should be more interested in sustaining investor interest rather than killing his joy. The primary market enjoys robust health if the secondary market is buoyant and thriving which is why higher quotations vis-À-vis the offer price should not be a matter of concern.

Lower quotation vis-À-vis the offer price of course should be. Let the greenshoe then by all means perform the mopping-up operations but not the dousing one.

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