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Journalism of Courage
It was an investment decision that retail investor V. Shah rues even today. He invested Rs 30,000 to buy 100 shares of Cinevista which came out with a book-building issue at Rs 300 per share three years ago. His investment is now worth only Rs 2,870.
8220;Had I put my money in a fixed deposit scheme, it would have become at least Rs 40,000 now. It8217;s a big loss. I stopped investing in the primary market since then,8221; Shah says.
Now the government and the regulator are going ga-ga over the success of the Maruti Udyog IPO which was sold out over ten times. With the stock markets rising on a daily basis, one can expect a host of book-building IPOs. There are already indications. Will the investing public take the bite again?
When book-building was introduced in 1999, the regulator and merchant bankers contended that it would help to 8216;discover8217; the right price for a public issue which in turn would eliminate unreasonable issue pricing by greedy promoters. But look at the current plight of these scrips. Several of those high-profile book-building IPOs have lost 50-93 per cent see table in the last three years.
Promoters have a propensity to raise public funds when the market is booming. The maximum number of such high-priced IPOs came in 2000 when the market was artificially rigged up by scamsters.
Market regulator Sebi then said issuers and investors could arrive at the right price through this mechanism where prices are fixed depending on the demand and supply.
Sensex has now rallied 21.5 per cent in the past eight weeks from a six-month low in late April and is now up 5.2 per cent for 2003. 8220;Indian markets are now facing a bull run. History will repeat again. Promoters will soon start coming out with IPOs through the book-building route,8221; said an analyst.
The thumping response to the Maruti IPO will now attract many fly-by-night promoters back into the game. 8220;Once a hype is built up and stock markets boom further, you will see a host of issues again. Indian promoters are clever in raising funds when the market is bullish and offload the stake later,8221; said stock dealer R. A. Podar.
Many promoters who allotted shares to themselves through preferential allotment and other methods later sold the stake when the market was in a bullish phase. Some of them even rigged up their shares to sell their holdings.
After Maruti, the government is likely to go for IPOs of companies like Bharat Petroleum and Nalco shortly. An ideal time for shady promoters to tag along. However, it may be tough for shady promoters this time.
Sebi has now decided to revise the book-building norms and make it more investor-friendly. It8217;s against institutional investors withdrawing bids. And just as institutions are allowed to revise bids in a book-built issue, Sebi has now said that even retail investors can do so too. This puts the retail investor on par with institutions. Sebi is also toying with the concept of a 8216;moveable price band8217; in place of the fixed floor price for book built issues. This means that rather than a floor price, a book built issue will have a price range.
The regulator is also tightening rules for companies issuing capital. Issuers will have to meet a minimum net asset requirement norm and complete financial closure before a public issue. The stipulation for a minimum net tangible assets would keep away shady guys from the market.
However, what8217;s left out is a safety net for investors who have lost money in almost all book-built issues in the last three years. One option would be that retail investors subscribing to a public issue should have the facility of an exit option for 60 days from the commencement of the book-building process. If the stock price on the bourses falls below the issue price and if the investor wishes to exit from the stock, he can surrender the stock to the merchant banker at the issue price and avoid making losses. Several investors complain that merchant bankers have been manipulating the prices in the book-building issue as well.
8220;Investors lost their confidence in the primary market as some weak companies raised public funds at a huge premium. The regulator needs to revise the system to regain the confidence of the investing public,8221; says Pradip Bhavnani, president of the National Association of Small Investors.
If the regulator gets tough, the situation will be different. Will it happen?
