On Friday, the benchmark Bombay Stock Exchange Sensex rose a round 100 points. After several intra-day ups and downs, the volatile Sensex surged dramatically in the last hour, and especially in the closing quarter, to record its 100-point rise. Was this just a relief rally after several days of continuous decline, or did chastened investment banks and ‘corporate houses’ that were the targets of the Disinvestment Minister’s wrath engineer a revival? Whatever the reason, one can be certain that the upward move will not lead to an investigation by the Intelligence Bureau, CBI, RBI or the capital market regulator.
In fact, inside accounts about the meeting between the Finance Secretary (FS), stock exchanges and officials of the Sebi suggest that the FS was nowhere as perturbed about stock price movements as the Disinvestment Minister. That brings us to some interesting assumptions regarding the mammoth Rs 20,000 crore of PSU shares that are currently on sale.
The reasons for last week’s panic over subscriptions are now well documented. Bunching of issue, the financial year-end, giant issue size and high pricing are some important factors. But a bigger one may be the ignorance of issuers and their advisors about the individual investor. Exactly half the Rs 20,000 crore of PSU issues, as well as all those that planned to clamber onto the primary market bandwagon are to be offered to individual investors. Of these, 25 per cent are specifically reserved for retail investors applying for shares worth Rs 50,000 or less. And another 25 per cent are set aside for high networth individuals, who are classified as Non Institutional Buyers (NIBs). The remaining to Qualified Institutional Buyers (QIBs).
QIBs are savvy institutional investors, but retail investors and NIBs are usually confused and susceptible to hype. Between them, the latter account for India’s two crore investor population that was supposed to come out in large numbers to buy up the family silver offered by the government. But these are also the same investors who lost heavily during the vanishing company scam of 1993-95 and have stayed away from the market ever since.
Did a few successful IPOs such as TV Today and Maruti Udyog indicate that these investors had forgotten their losses? Do these investors even have a depository account and access to Depository Participants (DPs)? Do they understand how the primary market has changed in the last decade, and are they capable of deciding the correct bid price for book-built PSU offerings?
The answer is negative; but neither the government (which was proposing to pump such a large number of shares into the market) nor their investment bankers bothered to address these investors or market the issues to them. While half the issue was to be offered to domestic individual investors who were probably live at Kanpur, Jaipur, Ahmedabad, Coimbatore, Chandigarh and Howrah, the road shows and marketing blitz was concentrated in Indian and foreign metros. Although investors have indeed rushed to open over one lakh new DP accounts in the last three months, the issuers did not bother to find out how many of these were meant for selling existing holding and how many were preparing to make new investments.
For at least two years, investor associations have been lobbying and pleading for a cut in demat charges. They argued that companies are the biggest beneficiaries of dematerialised trading and must bear a big chunk of the demat costs, which are currently loaded on to investors. Although Sebi has released (for public comment) a report recommending reduction in demat charges, a savvy government would have ensured that the fee reduction was in place before the mega issues opened for subscription. They would also have encouraged the setting up of new DPs in smaller towns, in order to prepare the capital market for the onslaught of mega offerings.
In building modern highways is part of the Prime Minister’s India Shining effect then building affordable and adequate capital market infrastructure should have been part of the preparation for mega disinvestment issues. Now consider the offers themselves. Investment bankers and the government were so confident about easy subscription that they slashed commissions paid to new issue brokers and killed their incentive to market the offers aggressively.
The same applies to investment bankers. Although none of the lead managers are saying anything, market sources say that their fees have also been badly slashed. A big area of confusion for investors was the book-built structure of the offers. Most individual investors were clueless about the best bid price for PSU offers while secondary market remained volatile and prices fell continuously.
Also, when Reliance opted not to subscribe to the five per cent shares (offered to it at Rs 190 each) just when the issue opened for subscription, investors read this as a sign that its secondary market price would dip on listing. Also, while the minute-to-minute broadcast of oversubscriptions brought high networth NIBs flocking to the IPOs of Maruti Udyog and TV Today, the opposite can be equally true. The low opening of the Patni Computers has scared away these investors, who usually borrow money and bet on being able to dump the shares on listing, at a big profit.
Investor groups have argued that the large 25 per cent allocation to NIBs needs to be reviewed, especially since Sebi’s own internal analysis found that anywhere between 40 to 78 per cent of them flip their shares. If the disinvestment ministry, finance ministry and Sebi were working in such close coordination, as suggested by the hectic meetings they held last week, then this issue should also have been addressed before the PSU offerings opened for subscription. But then the government was hoping that the same NIBs would rush to invest and help bolster support for PSU offers, wasn’t it? But this time the gamble didn’t quite pay off. As we have argued in these columns before, wouldn’t it have made better sense to make a fixed price issue to retail investors? Hopefully, the government will seriously address these issues before the next round of disinvestment.