Primary market revival will confer all round benefits

January 25, 2015 10:35 pm | Updated January 26, 2015 11:17 pm IST

The initial public offering of shares (IPOs), an integral part of the capital market, continues to be in a moribund state. The market seems to have gone into a slumber. It is important to understand why. The new issues market or the primary market (as it is otherwise called) holds the key to capital formation.

The related follow-on public offers (FPOs) have been crucial vehicles for carrying out the government’s disinvestment programme.

Promoters, who want to reduce their shareholding (usually to conform to the stock exchanges’ listing requirements), have also resorted to FPOs or offer for sale depending on their individual circumstances.

In the former case, additional capital is raised while in an offer for sale, a portion of the promoters’ shares are sold. The procedures followed in IPO or FPO are more or less the same. They involve the filing of a prospectus or offer documents with the Securities and Exchange Board of India along with various consent letters from intermediaries such as merchant bankers, registrars and bankers to the issue and so on. Needless to add the procedures have been found to be cumbersome as well as costly to the issuing company. Yet for a variety of reasons, SEBI continued with the practices set up long ago by the Controller of Capital Issues along with stock exchanges.

Technology welcome but...

Technology, which came early to the secondary market, was adopted by the primary market after a lag. Although lessons are still being learnt, the large scale application of technology has certain unintended consequences, which are not always beneficial to all or even a majority. The impact of technology on the financial sector and its intermediaries is a subject that can accommodate many view points, suffice it to say at this juncture that technological upgradation is a must for everyone in the financial sector but the fallout of a sudden technology infusion must be handled carefully.

From the capital market regulatory angle, technology has proved useful in diverse areas such as market surveillance and monitoring. The large volumes of trades that pass through the two principal exchanges could not have been handled without the technology. These enormous benefits to the secondary market — share market as it is called in common parlance — do not accrue to the IPOs, at least on this vast scale.

A far as the primary market is concerned, SEBI has been constantly working towards a safer and more transparent IPO market, whereas in the early years, the accent was on forcing disclosures in the prospectus. Recent initiatives include book-building (for better price discovery) and shortening the process — the time taken between application and allotment (or refund) of shares. An important recent SEBI initiative is to promote the idea of an e-IPO (electronic-IPO), which can considerably shorten the issue process. This will benefit companies and many categories of investors, including some from the category of retail investors. A discussion paper has been circulated on January 8. SEBI hopes to get feedback by the end of this month,

As with all technology applications, the immediate benefits of the e-IPOs will accrue to a select group of people. That does not mean technology must be discouraged: only all improvements in market procedures ought to be as inclusive as possible and benefit wider sections.

Retail investors

This brings us to the concerns of the retail investors, who, evidence suggests, are largely staying away from the capital market. There are many causes for this. The severe knocks that many IPO investors took in 2007-08, when many issues collapsed after listing, might still be a deterrent. There has also been the problem of vanishing IPOs — the so-called promoters have simply vanished from the scene after collecting the money. For companies, alternative avenues for tapping capital have emerged.

There has also been a relaxation in the norms governing promoters holding of shares. In the days gone by, promoters could hold no more than 40 per cent of the paid-up capital at the time of launching the IPO.

This was gradually whittled down. The latest rules are that 25 per cent of the share capital can be subscribed for by non-promoters in any company irrespective of its size. It is good that regulatory initiatives seek to provide more space for retail investors, among others. But the policymakers’ bias is clearly in favour of large investors, high net worth individuals and institutions such as mutual funds and insurance companies.

One last point — retail investors apathy may also be related to the absence of financial investments that meet their specific needs. For instance, the vulnerable class of pensioners and other senior citizens do have an avenue to invest that will deliver higher returns — the favoured bank deposits — without compromising on security and safety. Mutual funds, the officially recommended investment avenue for those who seek stock market level returns, have not delivered on their promises. Until recently, inflation has been a bugbear, and the government’s efforts to issue financial instruments that move in tandem with retail inflation rates have not been a success. The IPO market can blossom once again if investors’ concerns, especially retail investors, are addressed.

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