Before 2005, a typical book-building public issue in India was earmarked thus: 50% for qualified institutional buyers (QIB) which include mutual funds, domestic and foreign institutions, 15 per cent for High Net Worth Individuals ( HNIs) and the balance 35 per cent for retail investors.
Indian mutual funds had been miffed at the step-motherly treatment they received in the primary market. Their annoyance stemmed from the right granted to merchant bankers to exclude them from the allotment process by using their own discretion in the QIB category.
In one of its most significant announcements pertaining to the primary market, SEBI had then cracked the whip on the practice of discretionary allotments given to QIBs during initial public offers (IPOs). In contrast to internationally followed practices, the market regulator asked companies making an IPO to allot shares to QIBs in proportion to the bids made by them.
Investment bankers who were allegedly throwing caution to the wind while allotting shares to QIBs using their ‘discretion’ complained the loudest. Till then, shares were ostensibly being allotted and more importantly ‘not allotted’ using a variety of parameters including timeliness, quality and aggressive price of the QIB bids.
In an equally significant move, the market regulator had also asked QIBs to cough up 10% margin money while bidding for shares in an IPO. Till then, QIBs were not needed to pay any margin money, whereas retail investors had to ( and still have to ) cough up the entire amount on application. There were complaints from many quarters that some QIBs were using this loophole to boost certain IPOs to lure small investors.
To illustrate the point, many issues were oversubscribed several times over within minutes, if not seconds, of the issue opening for subscription. The speed with which issues were oversubscribed would make even the winners of the ‘Fastest Finger First’ contest segment of the popular ‘KBC’ show hosted by Hindi film cine-stars Amitabh Bachchan and Shahrukh Khan, go green with envy !
It is believed that this was the handiwork of certain ‘favoured’ QIBs who could of course, bail out, by revising their bids downward at a later date. The ‘massive response’ when flashed in the electronic media which was ‘live’ and inter-personal, often induced a sense of demand in the minds of retail investors, who were undecided on whether to invest in the issue or not.
Expectedly, merchant bankers cried from the rooftops of forex flow regulation problems for FIIs and dangers of hedge funds becoming beneficiaries, but none of that cut too much ice. The not so subtle threat in the argument that QIBs might not participate resulting in poor price-discovery leads for the retail investor bordered on the hilarious. After all, price discovery was supposed to mean more than simply a ‘no-brainer’ top of the price-band application or ‘cut-off’ price application for the retail investor.
The resultant shake-out over the last two years, I believe, has been for the better.
After this week’s flash-back, we shall crystal-gaze into the future next week about the primary market initiatives that SEBI is reported to be seriously considering.
(The writer is CEO, Lotus Knowlwealth, a knowledge based consulting firm.)