Unlike soap major Nirma's aborted exercise two years back, the recent book-building offer by the New Delhi-based Hughes Software Systems Ltd (HSSL) was a roaring success. Against a maximum target amount of about Rs 250 crore, HSSL's offer reportedly raked in a whopping Rs 6,000 crore from FIIs, corporates and other high net worth investors. While the merchant bankers are elated by such an overwhelming response to the first ever book-building in equities, the process itself raises some pertinent questions.

A major fallout of the book-building process is the relegation of smaller investors to a lesser role in IPOs. In the case of HSSL, 90 per cent of the IPO was through the book-building method while the balance 10 per cent was by way of a fixed price offer to individuals.

In the book-building component, only 15 per cent was reserved for small investors applying for less than 1,000 shares. In other words, in the book-building route, only about one-fifth of the IPO was available to small individual investors as opposed to the 50 per cent in a normal public issue.

What's more, though the fixed price component was reserved for individual applicants, no maximum limit for the application size was prescribed. Thus, the situation was tailor-made for market operators to edge out the small applicants through sheer financial muscle.

Disturbingly, there were many other loopholes as well. According to the bidding process for HSSL's book-built portion, the syndicate member, who functioned as the investors' agent, had the right to take the requisite bidding details from bidders based abroad even without the bid forms being physically received. This kind of discretion available to market intermediaries could possibly have led to untold manipulations.

Another more dangerous discretion given to the syndicate member is to waive the requirement of payment by certain bidders. In effect, this provision expects the syndicate member to double up as a banker to assess the credit worthiness of such bidders. Indian merchant bankers would not only find this a tall order, but also some of them might be tempted to misuse this facility. More so, since the syndicate member is empowered to reject the bid, where the payment has been waived, on any ground whatsoever! This could lead to a situation where the oversubscription could be built up artificially, ie, without a corresponding financial stake. Perhaps, this could be the cause of HSSL's overwhelming response! As if these are not enough, additional discretion has been reportedly vested in the book running lead manager (BRLM) to ``look at the seriousness and long-term commitment of the investor'' while finalising the allotment for the book-built portion.

Say, how will the merchant banker estimate these subjective things? Surely, if a merchant banker decides to refuse or prune allotment to a section of the investors citing lack of seriousness or long-term commitment, the aggrieved investors can and will take the matter to court alleging bias on the part of the merchant banker.

In fact, investors' apprehension in this respect has already been proved right. Many an investor of HSSL's public issue complains today that the lead manager, Kotak Mahindra Capital Company, allotted the book-building portion of 39.37 lakh shares predominantly to its own clients, associates and some handful of `friendly' institutional investors. A relevant question that arises here is, if merchant bankers can `privately' allot the public issue of shares to their cronies and clients, then, why make a public issue at all? Viewed from whichever way, it does not seem too intelligent to simply copy foreign practices when the Indian financial system continues to be burdened with a dithering regulatory infrastructure. Even the supposedly self-regulatory organisations here lack the teeth to bite.

History has shown that in boom conditions, merchant bankers tend to acquire a halo about themselves. For corroboration, one does not have to look beyond Amitabh Bachchan Corporation Ltd (ABCL), which promised Mars in the mid-90s but bit the dust instead. In the run-up to the private placement of ABCL's equity with institutional investors, the brand equity of Amitabh Bachchan was reportedly put at Rs 150 crore by Uday Kotak himself. But now, ABCL has turned sick and the Shahenshah of yesteryears, who stood as guarantor for the loan to the company, is being hounded by bankers.

A case of hunter becoming the hunted! Incidentally, Kotak Mahindra, which helped launch ABCL, is the force behind that led HSSL to price its offer so high!

(Arranged by INVESTAR - The Aarthik News & Research Syndicate) [E-mail feedback to: investar@bol.net.in]