Incentivised IPOs

Updated: Mar 29 2004, 05:30am hrs
The Reserve Bank of Indias discovery that United Commercial Bank had manipulated subscriptions to its Rs 240 crore initial public offering should surprise nobody but the babus in government. Bureaucrats have often dismissed any suggestion that public sector companies or banks would manipulate their stock prices, since salaried employees headed them. UCO Bank proves otherwise. The RBI has uncovered clinching evidence that the bank extended loans to select companies to subscribe to its IPO. UCO Bank was probably worried that its patchy history would deter investment; the question then is, were its capital requirements so pressing as to encourage manipulation Or was it an ego trip on the part of management Curiously, the IPO at Rs 12 per share was oversubscribed almost 18 times. Although the seriousness of RBIs charges against UCO Bank is unclear, this is not the first time that a government institution has incentivised companies to invest in its issue. A similar allegation was made against the Industrial Development Bank of India in the mid-1990s when it first went public. What is worse, IDBIs secondary market share price has hardly touched the high of Rs 130 at which it placed its shares. Suspicion about bank managements being involved in secondary market speculation surfaced again last year. That was when the prices of publicly listed bank scrips fluctuated violently on speculation over their plans to return capital to government at par value. However, there was no serious investigation into the allegations of price manipulation. In the UCO Bank case, the Securities and Exchange Board of India has also found major irregularities in the IPO allotment procedure, where a large number of investors who had opted for credit to their depository accounts were allotted physical shares. It is difficult to say whether the large physical allotment was mere sloppiness or a ploy to keep prices high by suppressing floating stock immediately after listing.

The bigger question raised by these findings is what compels a government undertaking to indulge in such manipulative practices Unlike the private sector, there is no obvious pecuniary gain to the management. RBI officials had already expressed the apprehension that such manipulation may be widespread. However, this is unlikely. Barring a couple of other banks with a blemished past, all other recent bank IPOs were made in a bull market, when banking stocks were in favour. That is not to say that nationalised banks have not indulged in dubious practices in the capital market, in order to help private companies raise subscriptions or repay loans by going public. At the same time, bank managements refuse to take on the normal business risk of lending to new businesses by citing the hanging sword of a vigilance inquiry. Clearly, we have a case of misplaced emphasis here. We need vigilance not as an oppressive, routine administrative threat but to be used in appropriate situations to nail transgressions and hand out exemplary punishment.