Guestcolumn — Postpone Book-building

The Securities and Exchange Board of India (SEBI) is reported to have decided to permit companies tapping the capital market with an issue ...

The Securities and Exchange Board of India (SEBI) is reported to have decided to permit companies tapping the capital market with an issue of Rs 100 crore or more to adopt the book building process for the entire size of their public offerings. This is done on the ground that the hybrid system, presently allowed, of confining the book-building process to the extent of the percentage of the issue which can be reserved for firm allotment. The net offer of 25 per cent of the securities to be offered to the public to made through prospectus, has failed to take off.

The present environment in the country, with the vast majority of investors having no direct access either with the registered stockbrokers or with the registered sub-brokers, is hardly conducive for implementation of the proposal. In advanced markets, all the investors have direct access to the stockbrokers and there are no sub-brokers in these countries. The book-building process gets full publicity and any investor desiring to participate in the offer is not denied an opportunity to do so.

Investors in the country have deserted the market. The number of applications against new issues had dwindled from 80.4 million in 1992-93 to a meagre 4.5 million in 1996-97. The sharp erosion in prices of the new issues coupled with the drop in prices of hundreds of midcap and small cap companies have driven the investors out of the market.

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Even taking for granted that the small investor is able to build bridges with the book-building process, it needs to be noted that the stock broking community is prone to distribute good issues among the chosen ones and the ordinary investor has to rest content with dud issues which will disenchant him further.

Arguments in favour of book-building are mainly the high cost of public issues and the case with which price discovery can be made through book-building. The answer lies, with regard to the first argument, to evolve ways and means of reducing the cost of public issues and at any rate there has to be a trade off between the cost of public issues and public interest. Public interest can not be sacrificed because of cost of public issues.

As regards the second argument, an equally effective way of price discovery would be to mandatorily require promoters, merchant bankers and underwriters to offer safety nets atleast in respect of small investors upto say Rs 10,000 for a minimum period of say six months with due adjustment against the offer price being made against the movement of the market as reckoned by the broad based CRISIL 500 or the Reserve Bank of India indices. Any prescription of this type will naturally result in ensuring that the issues are not overpriced.

It needs also to be noted that the book-building process, resulting as it will with a relatively small number of investors with the bulk of the offer being held by a few, will lead to a narrow and illiquid secondary market. This will facilitate easy manupulation of prices to the detriment of the general investing public. In fact, the large-scale manipulation in share prices which used to take place earlier was mainly due to the sharp shrinkage in public offer from 60 per cent to 25 per cent of the issued capital of a company. Thanks to the timely action by SEBI and the Bombay Stock Exchange, manipulation of prices of the shares of these small companies is now under check.

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The author is the former executive director of the Bombay Stock Exchange