The Hindu : Basking in the glow of Maruti?

Online edition of India's National Newspaper
Saturday, Jun 28, 2003

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Business

Basking in the glow of Maruti?

By C. R. L. Narasimhan

A market revival might yet not take place despite Maruti and the new proposals announced in a blaze of publicity.

The Securities and Exchange Board of India Chairman has announced a new set of rules for the primary market. The avowed intention — one of the regulator's long-standing goals — is to favour the retail investors. The timing of the announcement is just about right. Investors, who after a long time have had an opportunity to invest in a quality issue, can be persuaded to stay with the new issues market.

The moribund state of the primary market characterised by an acute scarcity of even passable equity offerings certainly cries for a policy stimulus although it is clear that alone will not suffice. Mobilisation from the capital market has been more pronounced in the debt segment. Although retailing of debt is not new in India, it cannot be compared to the corresponding investments in equities by the retail investors. Apart from other differences — in the size of offerings, in risk-reward expectations and so on — the focus of public policy in India has always aimed at strengthening the equity segment first. That in turn came to be identified almost exclusively with the small investors.

Investor protection has been the major goal of SEBI in its initial years. Evidently that is not a task that can be achieved so easily. Indian retail investors have had plenty of reasons to be disillusioned with the new issues market. For instance, the breed of vanishing companies (still to be penalised), the extraordinary misuse of the free market pricing (that the regulator attempted without safeguards) have all left an indelible mark on the investors' psyche too. In such a context, the successful Maruti IPO is considered to be a landmark. But the Union Finance Minister is perhaps being too optimistic in predicting a revival based solely on the Maruti experience. That is because other big-ticket issuers will not only have to advent but also take other steps to please small investors.

In the Maruti case, the allotment has favoured small investors (60 per cent) over institutions, a case of stretching the existing rules. The logic is that the more than three lakh retail applicants, who made for such a massive mobilisation, ought to be rewarded in some way. It is not certain at this stage as to whether the Government's thinking will be proved by investors' behaviour when Maruti starts quoting on the exchanges.

Meanwhile, the new rules for the primary market have been announced (but yet to be notified). Companies will be asked to retain excess subscription up to 15 per cent if they go through the IPO route; institutional investors' quota in the public issue brought down to 50 per cent from the existing 60 per cent; listing to be completed within six days of the closure of the issue (now it is 15 days). Institutional investors in the book-building route can modify but not withdraw their bids. And to give further protection to investors, a new tangible asset requirement will have to be met before a company can access the capital market. Also, drawing from the current developments in corporate governance standards, CEOs and CFOs will have to authenticate disclosures. A moveable price band to replace the present `fixed floor' system in a book-building IPO has been suggested. Finally, the concept of retail investors has been redefined: applicants who invest below Rs. 50,000 are to be called retail investors. At present, it includes those who apply up to 1,000 shares.

There is most certainly a limit beyond which a regulatory intervention by itself is not going to spur the primary market. If, following the Maruti's success, other PSEs (Nalco, the oil companies) are more actively considering a public issue, they had better highlight their own plus points and not blindly believe in the efficacy of a market suddenly been awakened up from a deep slumber.

As for the proposals, there could be differences in their perceived impact. That institutional investors have been precluded with withdrawing their bids is taken to be a pro-small investor decision. For in a book-building route, the institutions have allegedly created a false demand by bidding aggressively and thereafter withdrawing.

The implication is that small investors are roped in through the price manipulation and unlike the institutions have no chance of exiting. As against this view, others say that there is not enough empirical evidence. Again, asking issuing companies to raise additional capital (through a greenshoe option) however well intentioned denies the issuers an opportunity to fine-tune their financial planning. It is possible that some of them may be stuck with unwanted capital. The SEBI's justification is that it minimises post-listing volatility.

The application of a moving price band concept is evidently to give more flexibility in the issue pricing. It may however create confusion among the lay investors. Already, the plethora of capital market regulations, some notified, others at the announcement stage and still others at a conceptualisation stage, can confound all but the more initiated. That in conjunction with the sweeping company law changes under way would most certainly require a new type of expertise and a new breed of swaggering professionals. The whole point is that a sustained primary market revival may yet not happen.

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