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Journalism of Courage
In 1992, while unveiling one of the biggest reforms in the financial sector — the shuttering of the office of the Controller of Capital Issues or CCI which approved proposals of listed companies to raise capital, rights and other offerings, and the price at which they could be issued to investors — India’s policymakers reckoned that the new institution, the Securities and Exchange Board of India (Sebi), created to regulate the capital markets, would handle the job.
By April that year, Sebi had become the statutory regulator, but a kind of vacuum existed for the next few months. That was because after the CCI was abolished in August — and pricing of shares was set free — companies and intermediaries were quick to go out into the capital market, and offer shares to investors at prices decided by them and their merchant bankers.
And soon, trouble broke out. Hordes of promoters of companies, including several multinationals, went in for a preferential issues of shares — that is, allotted shares to a select set at relatively low prices compared to the market to benefit themselves. Alongside, given the latent demand for shares in the market, a separate quota, called the ‘promoters’ quota’, was created to reward bureaucrats, politicians, and others who could be useful to them.
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As many firms and promoters managed to do this blatantly, the new regulator, Sebi, was hesitant to step in — for, the Act that governed the regulator didn’t even mention the word ‘issuer’ when it came into force. That meant legal hurdles in policing companies, or those issuing shares. The Act described Sebi’s mandate as the regulation of intermediaries, or those in the capital market, such as merchant or investment bankers, stock brokers, registrars, etc., and the protection of investors.
So, in that period of free pricing, the regulator got around the problem by issuing new norms, or what came to be known as Investor Protection Guidelines.
Indirectly, the regulator forced merchant bankers to route the prospectus before each public offering through it — thus exercising a modicum of control over companies trying to raise capital from the market. Unless Sebi gave the go-ahead, they could not go ahead with their plans.
Subsequently, after an uproar in the media over the preferential issue of shares by promoters and multinational companies, the Finance Ministry and Sebi were forced to plug the gaps. Finance Secretary Montek Singh Ahluwalia, Sebi chairman G V Ramakrishna, the joint secretary in charge of the new division for capital markets, P J Nayak (who was to later become chairman of Axis Bank), and C B Bhave, then an executive director in Sebi, met to sort out the issue which showed the corporate governance standards of Indian firms in poor light.
In some ways, companies were capitalising on a free pricing era after years of suppression and arbitrary decisions in a controlled regime. They couldn’t be faulted technically, as in the transition period, no approvals were required for pricing of capital market issues. There was also no clarity on the prospectus or offer document that companies release with financial and other details while trying to raise capital from the public market.
But by that time, policymakers had realised that the free pricing experiment if allowed to continue, would lead to distortions and controversies. After a few days of discussion, they hit upon a variant of a pricing formula for companies or promoters issuing shares exclusively to themselves — the higher of the average price of shares over six months or two weeks — and fresh norms were issued.
But by then, many companies had gone past the gate. A top multinational company — now one of the biggest firms operating in India — was left chafing as the new rules kicked in. The MNC went to the Finance Ministry to complain bitterly against some of its peers, but could not prevail. So, pricing controls came back, though in an indirect form — and in the face of complaints that it was like going back to the old days of licensing.
In the first two years after being granted statutory status, Sebi started inspection of some of its intermediaries, or firms associated with the capital market. One such inspection was that of registrars who in the days of physical share certificates were tasked with wading through mountains of share application forms and, later, the allotment of shares under various categories of investors.
During that inspection, Sebi discovered some major irregularities — those who were allotted shares in top companies through the separate promoters’ quota included top serving bureaucrats, retired but once powerful civil servants, officials in financial institutions, and other important people. In fact, in some cases, top bureaucrats were allotted shares companies under the employees’ quota! Sebi chairman Ramakrishna went with the entire list to New Delhi — where, according to him, the then Finance Minister Manmohan Singh told him to do whatever he liked with it.
By then, the regulator had realised that all of this related to the period in which Sebi was not a statutory oversight agency, and did not pursue the matter further. But it had the desired impact — as it led to policy changes on the allocation of shares to investors over a period of time and, gradually, to changes in the standards of corporate governance.
Suggested Reading:
* Two Score and Ten: My Experiences in Government, by G V Ramakrishna
* Economic Survey, 1992-93 and 1993-94
shaji.vikraman@expressindia.com
