The controversial sale of shares in public sector oil company ONGC last week appears to be part of a full-blown state-sponsored operation in the stock market. The fiasco raises disturbing questions on the role of capital market regulator, the Securities and Exchanges Board of India (Sebi).
ONGC’s filings with stock exchanges on Monday showed that state-run insurer Life Insurance Corporation of India (LIC) picked up nearly nine-tenth of the shares offered through the auction. It was virtually the lone institutional bidder. The firm’s filings as reported by Business Standard on Tuesday also show that LIC bought 157 million shares (or a 1.83%) stake ahead of the auction, pushing up the ONGC stock price by 10%.
The mere fact that LIC drove up the ONGC stock price ahead of the stake sale and then cornered a lion’s share of the sold stake makes it appear like a badly-scripted con. Had any private firm done the same, it would have invited allegations of rigging and investigations by several government agencies, as former finance minister Yashwant Sinha pointed out after the auction, terming the LIC deal as “daylight robbery”.
What is even more galling is the dubious means through which LIC picked up its stake in the auction.
The government’s sale of 427 million shares or 5% of its stake in ONGC was launched as a one-day exercise on Thursday through an auction or ‘offer for sale’ method for the first time in India. Till 10 minutes to the market close, there were bids for only about 2% of the shares on offer and late in the night, exchanges declared that they had received bids for 292 million shares ‘around market close’. The next day the government claimed there were valid bids for 420 million shares, some of which were wrongly rejected as they came during the dying hours of trade.
Allegations and counter-allegations continue to fly between exchanges, the government, LIC and its custodian. A Sebi probe is on. Thus far, we can safely say this: a substantial chunk of bids were either resurrected after being rejected initially, or were placed only after market close.
The exact details on how this happened have not been revealed but from the available information so far, there are three probable theories.
The first theory is that exchanges were at fault and failed to update bids although they were valid and fully funded. Both LIC and its custodian, which held its funds and is responsible for confirming to exchanges whether LIC’s bids were backed by adequate funds, have propounded this view. Some government officials also put the blame on ‘technical glitches’.
The exchanges denied any technical glitch in a public statement and said all exchange operations ran smoothly, a claim that has not been contested publicly so far by other stake-holders. If the trading platforms had indeed failed in the dying hours owing to ‘technical glitches’, the proper thing for Sebi to do, and the government to accept, would have been to cancel the auction and start afresh on another day. This is the standard procedure when trading platforms falter and trades are ‘anulled’. This never happened, suggesting that this theory may be the weakest.
The second possibility and the one that a section of the market has come to believe is: LIC, after being asked to bail out the auction, bungled in arranging for the funds needed for the bids. So, the funds came in after market close and the government through Sebi coerced the exchanges to accept those bids. This is the most uncharitable story and, if true, will probably stand as one of the most blatant abuses of power by the government and the market regulator.
The third theory is the quasi-official version that exchange and Sebi officials have been talking about: the bids were made and funds provided in time, but there was a communication gap owing to which the custodian did not provide the intimation to the exchanges or banks delayed in transferring funds and hence the bids were rejected. Later, after Sebi got in the act, the rejected bids were reconciled and the order book was updated, which was why it took several hours after market closed to resolve the issue.
Of all the three stories, the final one is probably the least uncharitable as it suggests the least amount of indiscretion. But even if this were true, it still suggests that a huge chunk of bids were only recognized offline after-market hours, violating the sanctity of exchange-based trading and the concept of ‘trading hours’. Exchange officials say this happened, only after Sebi intervened and vetted the whole process.
Had a private financial institution been in a similar position in the stake sale of another privately owned firm and it or its custodians or banks messed up in the bidding process, it would not have been allotted shares by exchanges. “Please try again next time,” would have been Sebi’s response had the entity even dared to appeal. One could argue that the offer-for-sale happened for the first time and hence, Sebi and the exchanges went out of their way to solve problems as the participants were unfamiliar with the auction process. But such an argument ignores the fact that there were 292 million successful bids, including those of LIC by market close. So if LIC knew how to place bids for those shares, it very well knew how to bid for the other shares.
That the government dared to appeal to Sebi and Sebi sanctified a deal that broke its own regulations, puts a big question mark on its autonomy. It also raises questions about its ability to conduct a probe since it could have been a party to the late-night drama. But then, who else will conduct such a probe, under a regime in New Delhi that has tried to curtail the autonomy of almost all state-related entities?
In ordinary circumstances, one would have been tempted to give the benefit of doubt to Sebi. But neither are the circumstances ordinary nor does the current Sebi chairman, UK Sinha’s past record at the helm inspire much confidence.
On several issues: whether of Jalan committee recommendations on market infrastructure institutions or of the takeover code, Sinha seems to have waited for cues from Delhi rather than initiating any action himself. As Mint columnist Mobis Philipose pointed out in May, Sebi under Sinha also decided to keep its surplus funds in government accounts, diluting its financial autonomy.
The ONGC fiasco shows the problems with a regulator that is under pressure from the government.
