Fair share?

Last Friday the government provided parliamentary assurance that SEBI’s corrective actions in the IPO scam will lead to reallocation of shares to “victims”. This would have seemed comforting to many, including MPs. But it is worrisome from the point of view of economic logic and policy. SEBI had defined the IPO scam as a ploy by several individuals and institutions to corner shares in new issues by sending in fake multiple applications. These applications were aimed at grabbing the portion of the issues earmarked for small investors. That this is not quite the regular thing given the rules is not in doubt. But there is a doubt, explained in these columns before, whether the rule about rationing shares to various kinds of applications makes too much sense.

Rationing is a favourite choice of government authorities in dealing with certain excess demand situations. Almost always, it leads to various players trying to subvert the system — the incentive to do so is in-built in the system. That is why the Delhi Development Authority-organised lotteries for its real estate creations produce so much inventive crookedness. But when a proposal was made that DDA should arrange an auction, various local politicians in the Capital scuttled the plan in the name of giving persons of modest means a fair chance. They of course missed the point and their hope that more strict identity requirements will make fake applications impossible is likely to be as over-optimistic as SEBI’s is vis-a-vis IPO share allocations.

SEBI and the government are also on problematic ground when they argue that shares will be reallocated. Reallocation, as opposed to penalties and cancellation of allotment, should really be contingent upon the consent of those who received the shares. Harish Salve has been quoted as saying reallocation is a “quantum leap” and he is right. If compensation is the aim, SEBI should fine Peter to pay Paul. And both Peter and Paul will be better served if IPO share allocations are not rationed.