Public issue underwriting at standstill

MUMBAI, July 16: Underwriting public issues, once a roaring business, has come to a standstill following the poor primary market situation....

MUMBAI, July 16: Underwriting public issues, once a roaring business, has come to a standstill following the poor primary market situation. Only 2 brokers in the country were involved in underwriting a total amount of Rs 2 crore in the first quarter of the current year (1997-98).

This marks a steep decline from the hectic underwriting activity which had seen 1,712 brokers from all stock exchanges underwriting Rs 2,744 crore collectively in 1994-95.

According to Prithvi Haldea of Prime Database, in the early nineties the underwriting business — it involves a commitment from brokers and merchant bankers make to buy undersubscribed portion of issues — had become extremely lucrative, as the number of issues were growing and underwriting was mandatory. Also, there were no devolvements on account of the overwhelming public response.

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In this scenario there was a rush among brokers to bag underwriting contracts as this not only provided easy commissions but was also the only gateway to get application forms for marketing the issues and subsequently earn hefty brokerages.

However, many merchant bankers and brokers had lost money in underwriting business as most of the issues were dud ones floated by weak promoters and investors didn’t respond at all. As a result, many merchant bankers backed out from their underwriting commitments. In fact, SEBI had sent show-cause notices to over 100 merchant bankers for their failure to meet underwriting commitments.

According to Haldea, in October 1994 the SEBI decided to make underwriting optional. This made it clear that corporates with a sound track record would bypass underwriters when the market conditions were right.

"As time passed the response to issues started deteriorating leading to devolvements. This brought about a situation where brokers started rejecting underwriting offers. On the other hand, poor public reponse led to lesser brokerages and the entire stream of revenue nearly dried up," Haldea said.

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As a result, the percentage of issues which went in for underwriting moved down from 98 per cent in 1992-93 to 31 per cent in 1995-96 and 11 per cent in 1996-97.

In terms of the total amount underwritten as a percentage of total issue amount, the fall has been even more significant. While 1992-93 saw 88 per cent of the total public subscription being underwritten, the figure declined to 28 per cent in 1995-96 and 8 per cent in 1996-97.

In terms of the amount underwritten by brokers, Prime says that the amount grew from Rs 106 crore in 1989-90 to a high of Rs 2,744 crore in 1994-95 but fell to Rs 832 crore in 1995-96 and Rs 198 crore in 1996-97. With a commission of 2.5 per cent, revenue for brokers through underwriting fell in 1996-97.