India’s growing economy, infrastructure growth, booming
market and rising international trade have induced companies to draw up robust
business plans to seize the available opportunities. At the same time, the
companies look for various avenues to raise finance from the public. From the
various available options, Initial Public Offers (IPOs) remain the obvious
choice for garnering resources.
IPOs offer various benefits to companies, like access to
expansion capital, unlocking the value, debt swap, transparency of operations,
etc. India’s booming stock market, at least until early this year, witnessed
many IPOs being oversubscribed. In 2007, 100 companies raised Rs.34,179 crores
from the primary market, while in the first four months of 2008, 18 companies
have raised about Rs.14,908 crores. This shows the rise in the volume of the
IPOs.
Presently, the entire share application money is withdrawn
from the investor’s bank account on his making an application for shares through
IPOs. On completion of the allotment, the company has to ensure that the shares
are credited to the investor’s demat account and excess application money is
refunded through electronic banking channels within 15 days from the close of
the issue. In this process, investor’s money gets locked up without interest
payment for almost a month once he applies in the IPO, while the banks
incidentally use this float during this period.
Recently, SEBI has given ‘in principle’ approval to the new
payment mechanism for IPOs, with the objective to eliminate protracted refund
process. It is an investor-friendly proposition.
Under the proposed system, application money will remain in
the investor’s bank account until the completion of allotment process and his
account will be debited only if and to the extent shares allotted to him. This
concept is based on the ‘lien marking’ process. Under this, once a person
applies for shares, the share application amount is blocked by the bank and a
confirmation is sent to the company about availability of funds. The amount is
transferred from the investor’s account to the concerned company’s bank account
on completion of the allotment process. This system will eliminate the process
of refunding investor’s money as the funds will remain in his account and also
will relieve primary market investors from the anxiety of getting refunds on
non-allotment of shares in public issues.
It is hoped that SEBI will soon work out the modalities in
this regard in consultation with banks. It should also be seen that a large
number of banks get involved and gear up to implement this payment mechanism in
case of IPOs. It is expected that all the drawbacks attached to the earlier
Stock Invest Scheme will be taken care of.
Presently, Qualified Institutional Buyers are permitted to
pay only 10% of the bid application money in IPOs. But, other investors have to
put 100% of the bid amount. This needs correction. With the introduction of the
new payment mechanism, it is hoped that this disparity too would be eliminated.
On this subject, another important issue is with regard to
the share premium at which a company issues its shares. Under the present
regulations, the issue price is evaluated by the merchant banker. The SEBI
Guidelines require the company to file the prospectus that gives all the
relevant information of the company to an investor with regard to management,
business plans, liabilities, risk factors and so on, but in view of the
investors’ level of education in understanding the key parameters of the
business and financial position, it is difficult for a large number of investors
to analyse this information critically and take an informed decision. Recently,
SEBI has made it mandatory to get IPOs graded from a credit rating agency.
However, investors will always have to be watchful in view of the subjectivity
involved in IPO grading.
In spite of the stringent regulations, grey market operations
are in existence. At times, the grey market operations have adverse
repercussions on the listing price of the shares.
A company has to list its shares within 21 days from the
closing of its allotment process. It is felt that a reduction in this period of
21 days will make the primary market more efficient, transparent and may
eliminate or reduce grey market operations in the long run.
The basic philosophy of book building is based on the fact
that the price of any scrip mainly depends upon the perception of the investors
about the issuer company. The process of price determination starts on filing of
red-herring prospectus indicating the price band and inviting offers from
institutional buyers and intermediaries eligible to act as underwriters.
Simultaneously, the issuer company also collects bids from the general public.
After the bidding process is over, issue price is determined based on the bids
received. On determination of the price, the underwriter enters into an
underwriting agreement with the issuer. At this moment, effectively the issuer
company and the underwriter are aware about the total bids received and the
application money/margin collected by the company. Effectively, this undermines
the utility of the underwriting process. We expect that SEBI will consider these
issues in days to come.
At the Society, the transition process has begun for the
ensuing Diamond Jubilee Year. Anil Sathe and Ameet Patel have been elected as
the President and the Vice-President respectively for the year 2008-09. My
hearty congratulations to both of them and I wish them a successful tenure
ahead.
