Mumbai, Feb 18: The book-building procedure has not always resulted in efficient price discovery in the Indian security market. Speaking to The Financial Express, Inter-connected Stock Exchange (ISE) chairman MR Mayya said that "It is not clear as to whether the book-building system can be a good price discovery mechanism, as in quite a few cases the post-listing prices are significantly lower than the prices arrived at by the book-building mechanism."It can be mentioned that the prices, for example, of Cinevista and Cadila Healthcare, which had fixed their offer price at Rs 300 and Rs 250 on the basis of book-building were quoted at Rs 293 and Rs 130 respectively on listing. Currently, the prices of these two stocks are ruling at around Rs 98.55 and Rs 149.80. In another case, Shree Rama Multi-Tech, whose offer price was Rs 120, was quoted on listing at Rs 100 and is currently quoting at Rs 52.25.
The policy of book-building has not resulted in wide-spread shareholding as ordinary investors have neither the expertise to make an assessment of the valuation of shares nor any access to the book runner or syndicate member. The investing population is still not mature enough to undertake the book-building process.
Mr Mayya further added, "If book-building is resorted to, it should be confined to 50 per cent of the public offer with respect to issues up to Rs 10 crore and 25 per cent of the public offer with respect to issue above Rs 10 crore, subject to a minimum of Rs 5 crore for book-building."
With regard to reduction in the cost of public offer that the book-building system provides, Mr Mayya observed that there had to be a trade-off between the cost of public issue and the spread of equity cult across the country.
Mr Mayya also said, the per cent of the public offer should also be raised from 25 per cent to atleast 40 per cent and this can also be done in two stages of 20 per cent each, if the need arose.
With regard to corporate governance Mr Mayya said, "The essence of corporate governance is the enrichment of shareholders' wealth. Unless there is widening of the shareholding population, appreciation in share prices is meaningless as the benefit of appreciation remains confined to selective investors. There are companies with over 80 per cent of shareholding concentrated in the hands of promoters, and the benefit of appreciation in such cases does not reach the investing public in any significant way."
Mr Mayya added that while it was a joy to create wealth, it was a greater joy to distribute wealth.
Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
