Around 150 Indian companies are queuing up to raise nearly Rs45,000 crore through initial public offerings this year. But there is just one looming problem: not enough registrars, or companies that do the behind-the-scenes heavy lifting such as entering the details of share applications, allot shares and send out refunds to IPO applicants.
Two major companies in this field, Karvy Computershare and Intime Spectrum Registry, are currently restricted from any IPO-related business. Karvy has been under such a curb from India’s markets regulator since April 2006 for its alleged mishandling of IPOs between 2003 and 2005. And, since December, Intime, the second largest registrar in India, has also been restrained by a local court in Kolkata because of a legal dispute with MCS Share Registry.
That means that two of the companies that handled about 75% of offerings in the past nine months are out of contention. Both Karvy and Intime Spectrum handled 70 of the 102 IPOs in 2005. Last year, between April and December, together they handled 38 of the 51 IPOs.
“With more and more companies eyeing the capital market and the recent development of Intime Spectrum not being able to handle the IPOs, it is likely to add to bottlenecks in the public issue market,” said S. Ramesh, chief operating officer, investment banking at Kotak Mahindra Capital.
As a result, in the near future, “we will have to ensure that none of the big-ticket IPOs are bunched together,” said one merchant banker who did not want to be quoted.
Despite booming stock markets in India and a growing appetite for IPOs, hardly any entrants have entered the registry business. Even existing players note that it’s simply not lucrative enough, partly because average operating margins are low (about 8% to10%) and they are paid about Rs3 to Rs4 per share application. It is also difficult, they say, to predict in advance the volume of applications they might get amid a tough labour market for data-entry operators. Plus, the regulator requires a registrar to complete the paperwork in under 15 days from the IPO.
In any public issue, its difficult to predict the number of applications that will come in, says B. Narsimhan, vice-president of Karvy. “If one issue gets 100,000 aplications, another one may get 600,000. Accordingly the registrar needs to scale up or bring down the number of people it uses to do the tedious job of data entry and verification,” he said.Narsimhan said Karvy benefits from economies of scale because it can use staff from its other businesses, such as depository and stock brokerage services.
It isn’t like the issue of registrars and the paper-intensive processes haven’t come to the attention of market regulators.
In early 2004, when the government divested its stake in five major public sector entities including the Oil and Natural Gas Commission, the allotment process, handled by MCS, was seen as flawed. As a result, India’s stock markets regulator set up a 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, data entry by banks and registrars should be handled online.
Three years later, SMILE’s recommendations haven’t really gone anywhere. “We need to see that how can the registrar’s job of data entry be reduced and done in the electronic format,” said Prithvi Haldea, managing director of Prime Database, which tracks IPOs and other markets data.
The problem with the majors has been an opening for some of the smaller players. “Depending on the need, we can stretch our capability,” said G.R. Rao, managing director of Sharepro Services.
Sharepro, which handled just one IPO last year, “can comfortably handle five to six public issues at the same time,” he insists. Over at Bigshare Services, N.V.K. Mohan, managing director, says his company has the capacity of handling about 700,000 applications and is currently working on four to five IPOs.
Over time, “the capital market players will have to find ingenious ways of addressing this bottleneck and one of them could be to encourage new entrants in the registry business,” says Kotak’s Ramesh.