Investors pay heavily for unsafe book building

The book building model which was introduced with much fanfare three years ago seems to have given a raw deal to investors. Nearly 17 out 20...

The book building model which was introduced with much fanfare three years ago seems to have given a raw deal to investors. Nearly 17 out 20 IPOs which used this route to raise funds from the public have seen a massive depreciation in shareholder value, suggesting that the regulator should make drastic changes in the norms to avoid further rip-off of the system.

According to market estimates, investors are carrying a notional loss of around Rs 1,200 crore out of Rs 4,000 crore mobilised in the last three years. “When book building was introduced in 1999, our regulators contended that it would help to ‘discover’ 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 the scrips,” said stock dealer Pawan Dharnidharka.

According to him, book building was introduced in India without any safety mechanism for investors unlike many other western countries where investors are compensated by the underwriters or merchant bankers. “As there was no safety net for investors in the last three years, investors have suffered badly. It has now created a crisis of confidence in the book building system,” said a merchant banker.

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The maximum number of such high-priced IPOs came in 2000 when the market was artificially rigged up by scamsters. “The regulator then said issuers and investors can arrive at the right price through this mechanism where prices are fixed depending on the demand and supply. There are several loopholes in the guidelines, some of which were exploited by merchant bankers and issuers. This was worse than the period when the Controller of Capital Issues was fixing the premium in the eighties,” said Ramesh Laxman Pai. It’s true that the market was depressed in the last one year, but stocks of some of the companies have fallen by 85-90 per cent after the IPO, which is faster than the Sensex fall. If there was a safety mechanism for investors, analysts argue, issuers and merchant bankers behind the IPO would have been more careful and investors would have got a decent return.

One option can be that retail investors subscribing to the 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. “It should be mandatory on the part of the underwriter to buy the shares back from the retail investors for the first 60 days from the date of listing of trading in the stock,” said a merchant banker.

It is learnt that Sebi is in the process of approving a proposal of disinvestment of PSUs through the book building route with a similar safety net exclusively for retail investors. Sebi which is currently reviewing the guidelines in order to keep pace with the changing situation will have to look at this net for all IPOs. Safety net for investors is essential to rejuvenate the dormant primary market.