The bond issue broke new ground in being the first one to be made out of the shelf, or single, prospectus for Rs 3,000 crore of Safety Bonds which was cleared by Sebi in March 1998, with the right to retain oversubscription of another Rs 3,000 crore. The issue closed on May 19, 1998 and attracted69,073 valid applications for Rs 422.04 crore.

All the valid applications were accepted and the basis of allotment was finalised on June 9, 1998. From the basis of allotment, the average size of a valid application worked out to Rs 61,100, or about 12 bonds.

A safe guess can be made that the issue was largely favoured by the small investors.

Now that the bonds have been listed on the bourses, are the small investors assured of liquidity? If the sporadic trading on the bourses in the bonds issued by institutions like IDBI and ICICI is any indication, listing alone has not been able to guarantee liquidity to investors. It is here that the market-making mechanism assumes significance.

Market-making is nothing but a continuous process of providing two-way quotes of buy and sell. It assures the buyer or seller of a counterparty at all points in time. Since the essence of market-making is to ensure liquidity to small investors, normally it entails fixation of the ceiling as low as possible, say 50bonds of Rs 5,000 each, per investor per day.

In the case of ICICI, it is reported to provide market-making facility for a few select bonds from among those issued to the public in April 1997, December 1997, March 1998 and April 1998. However, its copybook is spoilt by the unilateral assertion in successive bond offer documents that the market-making facility could be discontinued at any time at the discretion of ICICI.

It is reported that ICICI has plans to fund about 20 per cent to 25 per cent of its asset base through retail borrowings by 2001. At about 25 per cent growth, its present asset base of Rs 42,000 crore could rise to Rs 80,000 crore by 2001. At this level, the outstanding retail borrowing has to be at least Rs 16,000 crore by fiscal 2001. As against this, at present, the outstanding retail borrowing is of the order of Rs 4,303 crore.

This means that after taking into consideration the intermediate redemptions, ICICI can be expected to raise about Rs 13,000 crore from the retailinvestors in the next three years or so.

Under the circumstances, one would have expected ICICI to remain investor-friendly by providing market-making without any veiled threat of discontinuance. Continuity apart, the present market making service provided by ICICI needs to be spruced up. For instance, the spread between the buy and sell quotes made in the current market-making process is as high as 3 per cent in most bonds. ICICI stoutly defends such a high spread.

It says that it is determined by outgoings like stamp duty and brokerage, besides its own profit margin.

However, except the stamp duty element, which is not in the control of ICICI, it must be possible for ICICI to require its market makers to operate on a reasonable brokerage of 0.5 per cent.

In a competitive environment, this brokerage then can be absorbed by the issuer, without building it into the two-way quotes. Additionally, ICICI should desist from looking for profit margins out of the market making activities. Such toning upefforts will enable ICICI to give efficient two-way quotations as part of its market making activity. Perhaps ICICI itself does realise the ineffectiveness of its present market-making process for its bonds. ICICI has recently introduced a new scheme known as `Anytime Facility' for the benefit of small investors.

As per the new scheme, resident individuals, HUF and trusts can buy and/or sell select bonds of ICICI `Safety Bonds' throughout the year through leading brokers and fixed deposit agents in designated cities.

For this purpose, ICICI has made available a price card to the brokers. This price card, which is valid for a specified period of time, contains the rates at which ICICI would buy and sell select bonds issued by it. The rates quoted by ICICI in its price card are revised on a weekly basis. For the present, ICICI has offered to buy and sell under this `Anytime Facility' two options each of Regular Income Bond (RIB) and Money Multiplier Bond (MMB) issued in March 1998.

Further, ICICI hasalso extended this facility on the buying side only for five options of RIB and 13 options of MMB issued by it earlier. While the advent of the new facility is a welcome boon to the small investors, ICICI has committed the old folly of fixing a high spread wherever it is offering two-way quotes. For example, the spread on RIB and MMB quoted by ICICI under the new scheme works out to 4 per cent and 4.3 per cent respectively.

By designing such a hefty spread, ICICI has sought to convert the `Anytime Facility' into another of its profit centres. In so doing, ICICI has sacrificed efficiency at the altar of profits. In that sense, it can be said to have violated the spirit of the market-making mechanism. It is in ICICI's long term interests that it comprehends the need to be retail investor-friendly.

From a different standpoint, Sebi should take a close look at the spate of bond offerings by development financial institutions and consider market-making mechanism a mandatory requirement, minus profit motive ofthe ICICI kind! That alone can enthuse the retail investors to participate in the primary market. The programmed expansion in many crucial sectors of the economy like infrastructure development require enormous debt funding.

Unless the debt market is widened and deepened in right earnest, it will be foolhardy to imagine that the scheduled capital formation will fully take place. The success of the repeated bond offers by IDBI and ICICI has demonstrated that public savings can be mobilised in good measure by financial institutions. However, for that to be sustained, investors need to be assured of liquidity on their investment. At all times.

(Arranged by Investar -- The Aarthik News & Research Syndicate)