The right offer

The Securities and Exchange Board of India is doing the right thing by trying to employ secondary market infrastructure in primary offers. The vast network of stock brokers and their agents can help publicise new offers and enable those in remote areas to submit their application forms. The discussion paper on e-IPOs suggests that surplus funds lying in the trading accounts of investors can be used to subscribe to initial public offers and also aims to shrink the number of days between issue and listing to two from twelve. Investors who currently stay clear of primary issues due to the lengthy lock up of funds may be persuaded to participate in this market with this modified process. Using funds lying idle in trading accounts for IPOs will also be welcomed by active investors as they will then not have to garner additional funds every time they subscribe to a primary offer. Companies will also bring down their cost of public issuance once this system is implemented.

The term e-IPO used by SEBI to describe this new IPO channel is however a misnomer. The primary issue will not be entirely through electronic means as the label suggests. Investors will be able to either submit physical applications or apply online through websites of market intermediaries. The regulator has proposed that market intermediaries such as stock brokers, clearing corporations, registrar and transfer agents, and designated banks will receive bids from investors and enter them into the bidding platform. The National Automated Clearing House solution implemented by the National Payments Corporation of India is also proposed to be made available to stock brokers; this will increase the speed of fund collection from retail investors.

The only hitch is likely to be at the stock broker’s end. The guidelines propose that money will be blocked from the broker’s fund balance with the exchanges for applications submitted through brokers or the clearing corporation. This means brokers will have to arrange for extra funds to make up for shortfalls, if any. Brokers might also not want clients to divert the funds available for trading to primary offers as it is will impact their trading turnover. With the margins of most brokers under pressure, they have been resorting to automation to reduce staff cost. It is therefore unlikely if they would have sufficient manpower to handle large issues. SEBI will have to see that the market intermediaries are adequately compensated for the additional work they will have to do in this system. In its bid to shorten the time-line the regulator should also be careful not to dilute investor protection. The disclosures that are currently mandatory in an initial public offer must continue. The prospectus should be made freely available, both in physical as well as electronic format, so that investors without internet access may take informed decisions on offers.

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