Panchu Mittir’s primary market rues

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: 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.