Mumbai: The finance ministry’s proposal of raising the minimum portion of public shareholding to 25% in all listed firms will open a floodgate for public offers in the Indian equity market, which is already expecting more than Rs75,000 crore worth of public floats.
Frenzied activity: A brokerage firm in Mumbai. IPOs such as Reliance Power’s tested the capacity of the market infrastructure to its core, and put officials from brokerages, banks and bourses under pressure.
The focus is now on the nation’s primary market infrastructure, and market participants are debating whether it can support so many issues.
According to Thomson Financial’s primary market tracker, India is one country saving the ailing global market for initial public offering (IPO) with $3.3 billion (Rs13,068 crore) worth of proceeds from eight deals, making it the largest IPO market in the world so far this year. India, in fact, accounts for 49.1% of global IPO proceeds in 2008.
“India still has a hefty IPO pipeline to come,” the market tracker report said. “In fact, this week, a total of three IPOs from India are set to launch. Emaar MGF Land Ltd’s IPO, estimated at $1.6 billion, will be the second largest public offer in the world so far this year, behind Reliance Power Ltd’s $3 billion.”
However, five public offerings that opened this week, including Emaar, struggled to be fully subscribed as investors feared locking their money in such issues because of the uncertainty prevailing in global markets. While Wockhardt Hospitals Ltd extended subscription dates and slashed its price band to Rs225-260 from Rs280-310, Emaar is keeping its issue open by three more days till 11 February after slashing its price twice. The issue was slated to close on Wednesday.
The Rs11,000 crore Reliance Power public offer last month tested the capacity of the market infrastructure to its core — from the technology platforms used by the stock exchanges to brokers who act as intermediaries, merchant bankers who help raise capital, the registry management services, which manage the back-end operations, and commercial banks that channel money flow from investors to the company. The IPO, the largest ever by an Indian company, saw more than five million applications placing bids worth Rs7.5 trillion.
Officials from brokerages, banks and bourses burnt the midnight oil to collect applications and ensure the latest information on subscription was updated in the system. The banking system experienced temporary glitches on the last day of the IPO because the electronic fund transfer platform found it difficult to negotiate with huge volume of transactions.
ICICI Bank Ltd, one of the bankers to the issue, had to engage 400 additional employees, while HDFC Bank Ltd deployed close to 1,400 people from other departments such as cheque clearing and cash management to handle the IPO work.
Karvy Computershare Pvt. Ltd, the registrar to the issue, hired around 3,500 people to manage the paperwork for this particular IPO.
While stock exchange terminals were kept open until midnight to feed the bid details, the banks had to pick up application forms from the brokers every two hours to start clearing the cheques of the applicants. Employees at various firms associated with the issue had to work overnight to update bid details.
Some of the employees of Mumbai-based Axis Bank Ltd said they had to work over the weekend (18-19 January) to collect applications and make the data entry.
Bhavesh Zaveri, head, wholesale banking operations and cash management at HDFC Bank, said the bank processed close to one million applications from 37 centres across India every day. “In smaller cities such as Alwar in Rajasthan and Hoshiarpur in Punjab, the bank deployed officers from other cities to ensure that the collection process is smooth,” he said.
The bandwidth of the system has to be increased, said S. Subramanian, head of investment banking at Enam Financial Consultants Pvt. Ltd, a lead manger to the Reliance Power IPO. “We should find more efficient ways to manage lakhs of applications; the technology used by the bourses needs to be upgraded and the banking system has to be equipped,” Subramanian said.
For a typical IPO, the data entry happens at three stages. Brokers, who form the syndicate, key in the bid details of each applicant into the IPO software provided by stock exchanges after receiving the application forms.
The bankers to the issue then collect these application forms and prepare a statement with financial details such as the cheque number and the bid amount. Once this process is completed, the application forms move to the registrar, who feeds in other details such as the applicant’s address and validates the demat account number.
Finally, the registrar completes the verification, finalizes the basis of stock allotment to each category of applicants, gets it approved by the stock exchanges and the issuer company’s board, and credits the shares to the applicant’s demat account.
The refund of application money to unsuccessful bidders is completed with two working days after the share allocation.
“There is a clear recognition by the Securities and Exchange Board of India (Sebi) to make the whole process less cumbersome, more transparent,and fair and less costly,” said Prithvi Haldea, member of the primary market advisory committee of the capital market regulator.
The regulator had recognized the need for system’s improvement many years ago.
In early 2004, when the government divested its equity stake in five large public sector entities, including Oil and Natural Gas Corp. Ltd, some investors were allotted more shares then what they applied for and some who didn’t apply at all were also allotted shares. The allotment process was handled by MCS Share Registry.
This event prompted Sebi to set up the Securities and Markets Infrastructure Leveraging Expert (SMILE) task force to look into the primary market infrastructure.
The task force’s key recommendation was that the process of filing applications and data entry by banks and registrars should be handled online.
Had SMILE’s key recommendations been implemented, the burden on registrars would have been reduced and IPO applicants would have got their money back faster.
Last year, members of Sebi’s primary market advisory committee formed a group for review of issue processing (GRIP) to look into the process once again.
While GRIP is yet to submit its recommendations, media reports suggest that the committee is looking at bringing down the time taken between the filling of application form and the allotment of shares and refund.
Merchant bankers, lawyers, brokers and registrars, the key components of the primary market, point out some of the deep-rooted problems in the entire process.
Referring to Reliance Power, Zia Mody, senior partner of corporate law firm AZB and Partners, said “it is time that we learnt from the mistakes and improve the current infrastructure.”
According to Mody, the “limited number of firms” operating in some of the key areas in the primary market is the real issue.
According the registrar’s league table rankings of Prime Database, Karvy Computershare and Intime Spectrum Registry are the top players in the business.
For a brief period last year, both the registrars were not allowed to undertake new businesses, but still they managed to do the most of the IPO business in 2007.
Milind Mondkar, managing director of Mondkar Computers Pvt. Ltd, said the merchant bankers “do not want to take risk with the smaller players.” But merchant bankers said that there is very little interest among the smaller registrars to scale up their business.
“It’s an open field,” said Ravi Kapoor, head of equity capital markets at Citibank Global Markets India Pvt Ltd. “There is (indeed) dearth of strong players in the registry business. New players should take effort to scale up and compete with the few large firms that currently do this business.”
In addition to the registry operations, the brokers also complain about the software of the exchanges.
“The stock exchanges should provide V-SAT connectivity even to distant and remote centres,” says Rakesh Mehta, chairperson of retail brokerage Mehta Equities Ltd. The firm has a retail unit in Assam’s Tinsukia district, which is home to the oil city of Digboi.
“There are many investors in this region,” said Mehta. “However, it is largely unconnected.” He also pointed out that in districts such as Tinsukhia, there are no private sector banks to clear cheques.
In most of the IPOs, private sector banks participate as collecting banks or the bankers to the issue.
Most public sector banks, including State Bank of India, the largest, which has penetrated India deeper than their private sector peers, do not participate in IPOs in a big way.
The core issue is not just about reducing the time taken for allotment of shares of an IPO but also in bringing more firms to each segment of the primary market infrastructure to ensure greater transparency, efficiency and fair trade in the system.