Commentary/Yazad Darasha

Welcome to the IPO Marketing
Board of India (formerly RBI)

Now everyone is watching as the same machinery makes lame-brained attempts to infuse again some life in the near-dead markets.

Anything goes in the name of regulation. One day the finance ministry decides to scrap the office of the Controller of Capital Issues and allows free premium pricing on initial public offerings. Soon the khiladis clean up at the investor's expense by offering shares at ridiculous premia. On listing, the shares slump below the offer price and the investor loses a packet.

What is the solution? Bring back the CCI or some form thereof! At least, that is the thinking in some sections of the regulatory framework, especially the Securities and Exchange Board of India.

When irregularities in forward transactions were threatening to swamp investors on the stock markets, SEBI took an almost unilateral decision and banned such trading.

When the howls of protest reached ear-splitting levels, forward trading was reinstated. But the new restrictions made such trading so non-remunerative, that marketmen would rather not have it at all!

When this principle of knee jerk responses finally threatened to kill an already dying capital market, the finance ministry's panacea was as unimaginative as expected - get the domestic financial institutions back into the act as the white knights of the markets.

This is an old remedy. The Unit Trust of India, the Life Insurance Corporation, the General Insurance Corporation all have a market presence by virtue of the mutual funds they manage. In the past, these institutions were periodically asked to prop up a sagging market, especially when the time came to disinvest public sector equity.

Today, the idea of a government-sponsored institution acting as a prop for a stock market is anathema to most market pundits. By its very nature, such a prop is temporary, against the principles of free market operations, and would probably do more harm than good in the longer term.

But try explaining that to a finance ministry besieged as it is with criticism about its handling of the stock market crisis. Would a finance minister like his/her term to be viewed as the one that killed the capital markets? Certainly not. So a short-term, vision-less solution would do.

Besides, we should be more than just a little concerned about domestic financial institutions being press-ganged in to pumping support funds in to the markets, because it is our money they are playing with. We are the ones that invest in the mutual fund schemes of DFIs, not the finance ministry.

And thus does the tinkering - using public money - continue, by a finance ministry bereft of ideas, solutions or even the means of arriving at solutions that work.

There is also the ugly side of regulation. By its very nature, a regulator is the person or agency that puts laws in to effect. Comes a time when the regulator considers itself just a little above the laws, especially when the future of a friend is in jeopardy.

A case in point is the IPO of the Bank of Baroda. A public sector bank with a good profit record, BoB decided the time was right for an issue of shares to the public at Rs 75 premium. Two days before the Rs 8.5 billion issue was to close, there was a shortfall in collection to the tune of Rs 2.75 billion. Two days later, BoB announced an oversubscription.

A truly miraculous recovery, isn't it? Especially when you consider that the intervening day between the huge shortfall and the oversubscription was a Sunday!

Word in the market is the Reserve Bank deployed its biggest guns - deputy governors and below - to 'market' the issue. These worthies apparently 'convinced' the other public sector banks that it would be in their interests to subscribe to the BoB offer. The carrot being that if a bank scratched BoB's back, its own back would in turn be scratched when the time came to make a public offering.

Is this what we pay the RBI brass for? To market a bank's IPO? And would the resulting cross-holding be a healthy sign in an era where banks have to compete against each other for business?

Corporations too were apparently 'convinced' that investing in the BoB IPO would be good for them. Probably another way of saying that the investment would guarantee sanctioning of term loans in future. Now companies are offering the BoB equity around at a 20 per cent discount to the offer price, hoping somebody will bail them out.

If a private company had resorted to such tactics to sell an IPO, the promoter would probably have been locked away in jail, as MS Shoes Promoter Pavan Sachdeva found to his discomfort.

In my view, rigging the price of a share (the way Sachdeva is alleged to have done) in the run-up to an IPO would rate at par with arm-twisting to sell an IPO.

What is the difference between the Bank of Baroda and MS Shoes? Both are twisting regulations to sell an IPO. But one is a private individual. The other is a part of the regulatory framework.

When the regulators begin to think they are the government's marketing department, it is probably time to take a closer look at the regulatory machinery. And if it is not doing the job assigned to it, well, rename it the IPO Marketing Board of India. At least that would be more honest.