Cleaning Up The Market

SEBI’s move will go a long way in cleaning up the primary markets. Thenorms—applicable to companies filing draft offer documents after April 16—willalso spark off a chain reaction. Says Shitin Desai, vice-chairman and managing director ofDSP Financial Services: "Merchant banking itself will go through a shakeout."

Consider this: if the new set of guidelines were to apply for all the primary marketissues for the fiscal year 1994-95, of the 1,428 issues which opened, only 399 would havebeen eligible (see table). The merchant banker who handled the largest number ofissues would be able to do just one-fifth the number. Only 36 per cent of themanufacturing companies would have qualified while a whopping 89 per cent of thenon-manufacturing issues would have failed to hit the markets.

Under the new guidelines, as many as 62 Category I merchant bankers would have handledonly one assignment each and 36 only two each in the entire year. Clearly, a whole hordeof substandard issues have been hitting the market in connivance with substandard marketintermediaries. "If there was no justifi-cation for these guidelines, there wouldhave been an uproar by now, elections or no elections," says Sandeep Ghate, director,Securex Financial Services.

The highlights of the new set of guidelines include:linking dividend track record to access to the capital market, amendment of the listingagreement and broadening of the shareholding base. Says SEBI Chairman D.R. Mehta: "Toensure that companies list their securities faster, we have directed the exchanges tostart penal-ising those who fail to list within 30 days of the issue by charginginterest." Earlier the minimum time for listing was 70 days.

Mehta adds that in keeping the Malegam Committee recommendations on theprimary market, manufacturing companies which have not paid dividend for three years outof the preceding five can access the public issue market provided their projects have beenappraised by financial institutions or a scheduled commercial bank, and if such anappraising entity is contributing at least 5 per cent of project cost, whether throughdebt or equity.

To ensure broadbasing of shareholders, SEBI has stipulated a norm of atleast five public shareholders for every Rs 1 lakh of fresh issue of capital and 10shareholders for Rs 1 lakh of offer for sale. "This will be an initial and continuingdisclosure requirement," Mehta says.

SEBI’s moves have drawn flak, especially from the merchantbanking community. Asks Shitin Desai: "Under the guise of investor protection, are weregressing towards the days of CCI (Controller of Capital Issues)? The latest guidelines,once again, raise questions about SEBI’s role—whether it should be to look atproper disclosures to ensure that potential investors are provided all the informationneeded, or whether it should dictate who should enter the market and who should not?"

Says an office bearer of the Association of Merchant Bankers of India(AMBI): "It’s surprising that SEBI has laid down the requirement of dividendtrack record instead of profit track record since a company, even if it has made losses ina particular year, can distribute dividend from reserves under the present laws."Points out Vallabh Bhansali, director, Enam Financial Consultants: "In many closelyheld companies, dividends are sacrificed to plough profits back into the company for abetter yield." Sums up Haldea: "This guidelines should be modified toprofit-making for at least three out of five years or profit-making for the last threeconsecutive years. If this is accepted and applied to the 1,428 issues floated last year,396 more companies could have tapped the capital market and most of these would have beencomparatively good offers."

Another area of concern is the fate of bought-out deals worth Rs 1,500 toRs 2,000 crore made in the recent past. In the absence of three years’ dividendrecord, these investors will have no exit route, according to merchant bankers. Also, bywithdrawing the appraising authority from merchant bankers, the regulations make leadmanagers partially redundant. Says R. Sankaran of Ind Global Financial Trust: "Whatis the sanctity of such appraisals and funding when the issuer can enter into an informalequity buy-back arrangement with the funding bank?"

That there are some grey areas in SEBI’s guidelines cannot bedenied. "In any reform process, some wheat also gets ground along with thechaff," quips Ghate. But what is certain is that SEBI’s new moves mean that theentire ballgame of public issues will have to be redefined. Institutions may now be on theprowl for profitable companies in need of funds but unable to tap the capital markets.Several small companies will now be able to place smaller quanta—between 5 per centand 20 per cent—of their equity privately in order to raise funds. Says Shitin Desai:"Though it is not something new, the new guidelines may encourage thispractice."

What is undeniable is that the new guidelines will improve the quality of paper whichreaches the investor. Half-baked projects, fly-by-night finance companies, over-invoicedand unappraised projects will not be able to see the light of day. Says Haldea: "Thiswill also significantly kill price-rigging which is most rampant in small issues,especially in finance companies." Adds Mehta: "SEBI will also crack down onissuers offering discounts and incentives under various guises to firm allottees of publicissues." A guideline will be issued shortly. In the meantime, the reduced number ofofferings in future may well take the primary market to the old days of heavyoversubscriptions, with demand for stocks outstripping supply.