After more than 40 years of heavy regulation and anemic growth, the Government in 1991 dramatically opened the economy to market forces and promoted modernization of financial institutions. Government control of the prices of Initial Public Offerings (IPOs) has ended. The number of public companies rose considerably from 1,000 in the late 1980s to 6,000 by 1994. The historical experience of investors, wherein an IPO was an almost automatic winner, created an acceptance in the marketplace for any new issue. Finally, better regulation, enforced disclosure, and investor protection have greatly improved the integrity of the private capital market. While the capital market reforms are impressive, there are still areas that present major problems. The market has still not recovered from its skittishness about IPOs. Indian capital market institutions are still not completely up to world standards.
Earlier, when any company needed to issue additional shares it had to approach the Controller of Capital Issue to fix the price of its share but this was in fact an inefficient means of price discovery. To solve this problem the Securities and Exchange Board of India introduced a globally practiced Book-building procedure to effectively balance investor and issuer interest. The book-building process bestows blessings upon the company for the price and demand discovery. With a Book-building process the cost of public issue comes down considerably and so does the time taken to execute a deal. However, the book-building model, which was introduced with much trumpet blast three years ago with the intention that it would help `discover' the right price for a public issue, which in turn would eliminate unreasonable issue pricing by covetous promoters, plunged below expectations. This can be proved by observing the current dilemma over the scrips, which went for an IPO through the book-building route. According to a market estimate, investors incurred a notional loss of around Rs. 1,200 cr out of Rs. 4,000 cr which was mobilized through the book-building process in the last three years. This suggests that the Book-building mechanism does not serve its very purpose. Stock prices were bid up and prices of many new issues rose to levels simply unjustified by future earning prospects and the price is not discovered but rather it is fixed by institutions associated with issues. Some highly questionable or outright fraudulent, financial deals were sold to innocent common investor. |
