Professor Panchu Mittir, when I met him last, rued some undesirable developments in the Indian primary market over the past six months. He thought to himself that if greed?unconscionable, unbridled or enlightened?and fear are the two driving forces of all financial markets, then cyclical excesses are bound to arise from the interplay of these forces. The Indian primary market is only displaying this inherent vulnerability of all financial markets.

But who is Panchu Mittir? Panchkadi Mitra, as his actual name goes, is a retired, kind-hearted, septuagenarian professor of economics at a well-known Kolkata college. He lives with his wife in his old ancestral house at 92/1/A Chaku Khansama Lane in Central Kolkata, and is in possession of a brilliant mind, a ultrathin Macbook (a gift from his Harvard-educated-Wall-Street-investment-banker-son), a collection of about 3,000 books, Birbal, a russet brown cocker, and a violin gifted to his father by Nandalal Bose. He has an abiding interest in the stockmarket. But he is not a Ben Graham, nor are his investments very large. But he has stayed with them for years.

Having been a stock investor for over four decades, Panchu Mittir has seen it all?the good times and the bad. But he is disturbed by the rise of the illegal grey market, and does not rule out a covert role of issuers and investment bankers in encouraging it. The context now is almost a flashback to 1994, when new issues commanded large premia in the grey market.

Being a professor of economics, Panchu Mittir knows that all unlawful markets arise because of official markets? inability to fulfill an economic need. Rationing, price controls or legal restrictions give rise to black markets. Similarly, grey markets in foreign liquor, perfumes, cigarettes and electronic goods exist when there are no authorised distribution channels for these goods, or if there are, because of duties, the price differential between the original and imported price resulting in arbitrage opportunities. Freer imports tend to eliminate grey markets. Panchu Mittir feels that a similar approach would help in curtailing the IPO grey market.

Panchu Mittir had studied the IPO market internationally. He knows that in many European countries like Germany (Neur Market) and the UK (London Stock Exchange), grey markets are permitted; there are also legal ?when-issued markets? in government securities. But in India, they are illegal.

In its functioning, the grey market displays the characteristics of stock futures, where short selling is permitted and settlement takes place on the day of listing, partly by delivery of shares and partly in cash. Among the principal reasons for the existence of grey market premia in IPOs in India and their recent proliferation are:

* underpricing of an IPO and information assymetry;

* inefficient price discovery through the book building process on account of investor segmentation and the grey market seeking to provide a better price discovery mechanism;

* sentiment around the IPO which is a function of quality of the issue itself and prevailing secondary market conditions;

* the demand-supply situation, which is a function of the issue size, retail quota and the extent to which the issuer is able to hype the issue;

* marketing hype, growing demand-supply gap and grey market premium forming a vicious cycle;

* unscrupulous issuers and investment bankers making good use of it to create artificial demand for an IPO

* unofficial financing arrangements, increase in interest cost on account of a long gap between the time an investor parts with his money and when the shares are listed, and consequential impact on premia.

Panchu Mittir recollected having read a report of a committee of eminent market experts on the securities market infrastructure about four years back. The committee had identified several redundancies in the present issue process and suggested its reengineering to enable listing to take place within 10 days from the closure of the book. Reduction in the days to allotment and days to listing should reduce interest cost for investors and impact the grey market premium and curb grey market activity. But it may not fully eliminate it. In advanced economies, official grey markets coexist with book building. So long as issues continue to be marketed directly to retail investors, allotment uncertainties will continue. Because of oversubscription, mispricing of issues and marketing hype, it is unlikely that the grey market will disappear.

It is important that squeezing the issue timetable is accompanied with stricter and enforceable guidelines on the marketing of issues, which is now helping create an artificial market. Panchu Mittir, as I understand his views, feels that these steps should spell succour for the country?s retail investors.

The author is dean, finance & corporate governance, Tata Management Training Centre, Pune. These are his personal views.

Email: panchumittir@yahoo.com