Coal India IPO fiasco: Merchant bankers feel the heat

The six lead managers of Coal India were reportedly advised by the Department of Disinvestment that SEBI was the final authority in the case relating to refunds to the retail investors who did not receive allotments in the Coal India IPO.

Around 10,000 investors did not receive allotments in the IPO for various reasons. SEBI shot off a letter to these six merchant bankers that they should not employ the top 10 brokers who handled the IPO until this case of non-allotment is resolved.

Future IPO issuances could be hit due to this, said experts.

“It is interesting to note that January saw Rs 3,700 crore worth of IPOs followed by Rs 270 crore in February,” said a distribution manager with a large broking house. “March would be better than February but the IPO market in the future would depend totally on clarity with respect to the top 10 brokers in question, as they are vital for distribution.”

Fear factor

In fact there is a fear that any ban on these brokers could severely hit smaller IPOs.

Large IPOs have their fair share of problems too.

Intermediaries feel that the appointment of a single Registrar and Transfer agent for big issues dilutes service delivery, and that SEBI could mull using multiple Registrar and Transfer agents.

“Karvy is the only registrar and transfer agent for large issues and they are sometimes not able to manage the huge flow of applications in issues as big as Coal India,” said Mr Aiyub M. Yacoobali, MD-South Gujarat Shares and Stockbrokers, a Surat-based broker. “In addition, Karvy's head office is in south India whereas most investors are from the Western part of India and this leads to communication barriers.”

It is impossible to be 100 per cent accurate while punching in the data that has been entered in the forms and a one per cent rejection rate is normal, said brokers.

To put things in perspective, Coal India saw more than 14 lakh applications; and 10,000 rejections is less than one per cent.

Brokers said that they have started paying compensation to investors. “We have paid compensation for our forms and for other broker forms for which we are at fault with respect to following processes,” said the head of investment banking at a large brokerage.

“But what about those forms for which we are not at fault?”

Often, investors don't know how an IPO form is to be submitted. Without submitting it through a broker and receiving acknowledgement for it, investors file applications directly with their bank. How can such cases be compensated, asked brokers?

There have also been instances of brokers being asked to refund money for forms originating at a centre where they do not have any presence, branch, franchisee or sub-broker.

“Investors who have produced details of their submission in the correct format have been compensated and we have been updating every settlement detail to SEBI through our respective syndicate members,” said a broker.

There is a case for mistrust between brokers and retail investors in this episode. Brokers said that all retail investors are not ‘long only' (buy-and-hold); most of them come in only for listing gains. They also pointed out that SEBI has sent a letter and not a suspension notice or an order which might have prompted the brokers to take recourse to appeal.

Investors could use this route to connive with smaller brokers, receive compensation for rejected forms from large brokers without submitting their forms properly and share the spoils, fear some brokers.

“With brokerage from IPOs dwindling by the day, it makes sense for brokers to depend more on brokerage from the secondary market,” said Mr Prakash Diwan, Head-Institutional Equities, Networth Stock Broking.

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