These Books Are For Building

THE irony was amusing. Five days after M.G. Damani, president of the Bombay Stock Exchange (BSE) wrote to the Finance Minister, P. Chidambaram, warning him about the aggressive buying by foreign institutional investors (FIIs) in a few select scrips, ("Our markets have virtually become FII-driven, which is dangerous," he wrote), Damani was one of the speakers at a seminar on book-building, a concept that will invariably give foreign institutional investors (FIIs) a powerful hold on even the primary markets.

A concept widely used in many other countries but not yet in India, book-building is a process of fixing the price for a share issue based on feedback from potential investors on how high they are willing to bid to pick up the shares. Thus, it is somewhat of an auction. Once one has the peak price potential, explains Julian Summer, managing director, Merrill Lynch Equity Capital Origination, Hong Kong: "The issue is priced slightly below the highest level at which the entire offering can be sold. Underwriting, which is mandatory, is done only at the end of pricing."

The Securities and Exchange Board of India (SEBI) has announced Clarification 13: the new book-building guidelines to be effective from November. The basic highlights are the appointment of one of the lead managers as the 'book runner' and mandatory underwriting of shares that are offered to the public after the book-building. Says D.R. Mehta, chairman, SEBI: "Since it's a new concept, we decided to go cautiously. That's why we kept the limit to share issues worth Rs 100 crore and above."

However, the real potential of book-building exists in PSU disinvestment which the current Government appears committed to pursuing. Says Summer: "The most successful book-building options in the world have occurred in privatisation efforts by governments. Large disinvestments of state sector units have helped raise amounts far beyond expectations in several developed and developing countries." Telecom Corporation of New Zealand raised US $818 million through book-building in 1991. Among other notable book-building exercises for PSU disinvestment are Merrill Lynch's raising US $1.16 billion for Indosat-PT Indonesian Satellite Corp in 1994, and US $1.3 billion for Telefoncia de Espana SA (Spanish Telecom) last year. And the technique has already reached China. Bear Sterns book-built around US $475 million for Guangshen Railway in April.

Merchant bankers and primary market operators are almost unanimous in their view that the book-building option, especially in PSU disinvestment, can only help. C.B. Bhave, the former SEBI executive director who takes over this week as chief of the first Indian depository, however, adds a note of caution: "In book-building cases abroad, the checks and counterchecks by market intermediaries are taken for granted. Choosing a quality of investors by the bookmaker means that the market has to start following stringent norms within itself. A replica of the western model may be a mistake in this country where the nexus between the retail investor and the issuer is quite strong, as has been repeatedly noticed in the past."

Says Damani: "If the regulator is open to this idea, market intermediaries can become very flexible and receptive to the concept. Like all new concepts in this country, this also has to be an evolving process." Damani is also enthused by the fact that with paperless BOLT trading, BSE brokers themselves could become book-runners or syndicate members known as market makers. "We can collect all orders by BSE brokers and pass them on to the lead manager to build the book," says Damani. And adds: "Apart from reducing risk for the small investor, the book-building option will also cut down the grey market illegal operations at the stock exchanges."

However, this is easier said than done. According to leading capital market lawyer Cyril Shroff: "If one of the avowed objects of book-building is to reduce risk to under-writers and other intermediaries arising from intervening market changes and from the shenanigans of the issuers, I do not see how that will be achieved by the Indian style of book-building, unless a mechanism is evolved to bridge the time period till the actual collection of subscription moneys from the investor. Also, collection of amounts from the investor even before the finalisation of the price seems to be a contradiction in terms, if not a contravention of Company Law."

S. Balasubramanian, chairman, Company Law Board, agrees. "When new practices are adopted, there have to be some changes, and there has to be coordination between the various agencies involved. This has not yet happened in our country. In some cases, SEBI's guidelines contradict the Companies Act." He suggests a single nodal agency in charge of all capital market matters, like in the United Kingdom, where provisions relating to the capital markets have been taken out of the Companies Act and put under the purview of a nodal agency.

Clarification 13 has indeed opened the doors to book-building. Now it is for the issuers and the intermediaries to evolve a process and to fine-tune it to the Indian environment. Says Mehta: "We are open to suggestions before issuing renewed guidelines." But, Bhave adds: "First, let's strengthen the market mechanisms to support such an exercise. Only then can book-building be successfully implemented." A little help from the finance ministry in amending some of the rules would surely go a long way, especially in the light of the current Government's commitment to set up a PSU disinvestment committee.