The better part of last week has been dominated by utter chaos following the over-allotment goof-up in the Oil and Natural Gas Corporation?s (ONGC) mega Rs 10,000 crore public offer which concluded recently. Fortunately, the damage which had been done on account of the over-allotment in certain categories of investors has been minimised after the Securities and Exchange Board of India (Sebi) and stock exchanges stepped in with a clear-cut damage control plan. For some days, the markets were in a tizzy because some investors had already sold the shares in the market on the basis of the incorrect allotments. But after the auction on Monday, much of the problem has now been addressed.
However, all this brings to the fore the larger, and more important, question: At a time when the Indian stockmarkets are looking up and the primary market is witnessing healthy investor interest for big-sized public offers, is the supporting infrastructure in the Indian markets adequate? Don?t forget, even the Power Trading Corporation listing has been delayed because of ?technical problems? after the issue. Obviously, these two fiascos ? in particular the ONGC one ? have come as a major wake-up call for the primary market as a whole, at a time when the entire market and investment banking community was basking in the glory of the six successful public offers from the government stable. But suddenly, even as disinvestment minister Arun Shourie talks of raising Rs 1 lakh crore every year from the markets, a section of the primary market looks ill-equipped to handle the load.
A cross-section of registrars and investment bankers I spoke to are worried. If the government, after the elections, is to keep the disinvestment process on a fast track and chooses to continue with the public offer route, the primary market infrastructure has to be strong enough to support the big plans. Clearly, the registrar community is currently the primary market?s weakest link. While it may be argued that the goof-up by one registrar does not mean that the entire registrar community is not up to the standards, there are some aspects which need urgent attention.
Consider a simple fact: Over the past month or so, the primary market has seen more money being raised than what was raised perhaps in the last five years. While this kind of appetite prevails for new paper, there are only very few big and quality registrars in the market today. As one investment banker points out, there is a need for more quality registrar outfits, now that business is hotting up. Second, issues will not just be sold to qualified institutional buyers (QIBs) alone. Retail applications will hold the key and most issuers and investment banks will now be pushing such applications in a major way.
The total pure retail applications (of under Rs 50,000) for these mega government offers were to the tune of about 1.7 million, of which nearly one million was for ONGC alone. While the smaller bank IPOs also saw retail interest, the last few mega offers showed that retail investors are also coming in for higher priced issues. If the retail element is further pushed, which is probably the desirable thing to do, will the registrars be capable of taking this load and delivering the goods?
Registrars often outsource the data entry work to outsiders, and chances are that small, ill-equipped entities may take up this job. However, while the data entry job looks relatively less important, it can hold the key to the successful completion of the issue process. For instance, if a shoddy data entry operator mixes up a simple thing like the application amount and the allotment amount, it can cause havoc in the entire allotment process. Registrars concede that there will be situations where smaller entities pitch for jobs offering low rates, tempting registrars to pick them. However, opting for low cost outfits may end up compromising on the quality of the work. Hence, registrars need to be very cautious about who they outsource work to. The payment structure for registrars also needs to be delved into.
The ONGC goof-up may well be called a human error. But errors of this kind, even in one link in the IPO chain, can make the Indian primary market an international laughing stock. Indian markets cannot afford it. Not at a time when it?s just hitting big time. Post-issue formalities are critical for a smooth conclusion to the entire process. And like the ONGC fiasco has shown, investors can be severely hit by such errors. Towards that end, Sebi needs to initiate a detailed quality audit of registrars to find out whether they are indeed prepared for a resurgent primary market.