The finance minister must be feeling vindicated. Despite a huge fiscal deficit and absence of reforms, foreign funds are once again buying Indian stocks. What does this say? After initial doubts, have the money managers been convinced that the borrowing and spending program of the Indian government will provide the necessary stimulus to bring back the country on its 8%-9% growth trajectory? Or have individual stocks turned out more attractive than the country and their growth is immune to any policy changes due to the huge untapped markets? Some minor stake dilution in a few PSUs is alas not the magnet for this money. There was not a single PSU stake-sale over the last five years and yet foreign funds continued to chase Indian paper. Liquidity from the developed world is finding its way to the markets to maximise returns quickly. No wonder valuations of many frontline stocks are discounting two years' forward earning. Though markets are in a state offlux across the globe, the degree of high and low intra- or inter-day movements appears more intense in India 'due to lack of depth. The gravity of the situation even prompted Pranab Mukherjee to indicate in the budget speech the government's resolve to encourage listed companies to ensure minimum 25% dilution of equity in favor of public shareholders. Keeping aside the controversy over what constitutes 'public' shareholding, the focus on improving liquidity should not be diluted.
There are three areas of volatility that need to be addressed. First stems from post IPO listing. Another source of stock flnuctuations is corporate announcements. The last, which the finance minister referred to, arises from high promoter holding and low public float Ironically, the origins of all the three types of stock movements can be traced to the acts of omission and commission of the government or the regulator. Rewind to those days when the world was discovering India's intellectual capabilities and investors were eager for a slice of the pie. Unlike manufacturing, the capital requirement ofIT companies was small, and they had many sources of funding. To persuade them to enter the trading ring, the regulator amended the listing rules to bring the mandatory public. holding to as low as 10%. Introduction of book building for efficient price discovery is another reason for the wild swings on listing. Investment bankers contended institutional investors were best placed to discover the price of an offering. Besides, selling to these enlightened investors was quick and cheap compared with collecting retail subscription. At hindsight, it is now evident that issuers and institutional investors can collude to fix prices. The presence of institutional investors whets the appetite of retail investors, for whom a 30% quota is earmarked in the IPO. High prices, unmet retail demand and rush of institutional investors to exit to capitalize on this hunger have resulted in over 100% gain on day I and a downhill journey for the stock thereafter, making a mockery of the price-discovery process.
To contain listing chaos, the price band should be scrapped for retail investors.
Instead of running the book among institutional investors to discover the price band, the issuer should auction shares to retail investors by fixing the TIM or latest fiscal EPS as the benchmark and mention the industry PE average. Only after the retail demand is subscribed should institutional investors be allowed to bid, with the cutoff price at which shares are sold to retail investors treated as the threshold. The price differential at which shares are offered to two different constituents of the market would mean full-throated participation by retail investors as their share would be at a reasonable and cheaper price than that sold to institutional investors, leaving scope for steady appreciation. Institutional investors would have to wait till the price of the shares appreciate to the level at which they had bagged them to resort to large-scale dumping, which happens now on listing day. Issuers who do not want to sell their shares cheap to retail investors should be mandated to auction them to venture capitalists and institutional investors with a one-year lock-in. Not only would this scotch price rigging but lead to active interest by institutional investors in the running of the company so that when it is time for them to exit, the auction of their shares would fetch from retail investors an attractive premium based on past performance or a discount due to lackluster numbers. Merely enlisting 25% public shareholders to make a company's listing meaningful is not enough. It is important to remember that the end result of the exercise is to douse the stock's volatility.
There are three areas of volatility that need to be addressed. First stems from post IPO listing. Another source of stock flnuctuations is corporate announcements. The last, which the finance minister referred to, arises from high promoter holding and low public float Ironically, the origins of all the three types of stock movements can be traced to the acts of omission and commission of the government or the regulator. Rewind to those days when the world was discovering India's intellectual capabilities and investors were eager for a slice of the pie. Unlike manufacturing, the capital requirement ofIT companies was small, and they had many sources of funding. To persuade them to enter the trading ring, the regulator amended the listing rules to bring the mandatory public. holding to as low as 10%. Introduction of book building for efficient price discovery is another reason for the wild swings on listing. Investment bankers contended institutional investors were best placed to discover the price of an offering. Besides, selling to these enlightened investors was quick and cheap compared with collecting retail subscription. At hindsight, it is now evident that issuers and institutional investors can collude to fix prices. The presence of institutional investors whets the appetite of retail investors, for whom a 30% quota is earmarked in the IPO. High prices, unmet retail demand and rush of institutional investors to exit to capitalize on this hunger have resulted in over 100% gain on day I and a downhill journey for the stock thereafter, making a mockery of the price-discovery process.
To contain listing chaos, the price band should be scrapped for retail investors.
Instead of running the book among institutional investors to discover the price band, the issuer should auction shares to retail investors by fixing the TIM or latest fiscal EPS as the benchmark and mention the industry PE average. Only after the retail demand is subscribed should institutional investors be allowed to bid, with the cutoff price at which shares are sold to retail investors treated as the threshold. The price differential at which shares are offered to two different constituents of the market would mean full-throated participation by retail investors as their share would be at a reasonable and cheaper price than that sold to institutional investors, leaving scope for steady appreciation. Institutional investors would have to wait till the price of the shares appreciate to the level at which they had bagged them to resort to large-scale dumping, which happens now on listing day. Issuers who do not want to sell their shares cheap to retail investors should be mandated to auction them to venture capitalists and institutional investors with a one-year lock-in. Not only would this scotch price rigging but lead to active interest by institutional investors in the running of the company so that when it is time for them to exit, the auction of their shares would fetch from retail investors an attractive premium based on past performance or a discount due to lackluster numbers. Merely enlisting 25% public shareholders to make a company's listing meaningful is not enough. It is important to remember that the end result of the exercise is to douse the stock's volatility.
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