The Bombay Stock Exchange has recently made a proposal to Sebi that the stock exchange can stand guarantor for purchase of shares in an IPO done through brokers, as an ordinary stock exchange transaction. This will help avoid multiple applications "racket" or the necessity of large applications which is a result of the proportionate allotment system.

Elaborating on this, BSE president Anand Rathi said that instead of the current format, the investor can place a buy order with a broker, who will then undertake the entire transaction on the client's behalf. The client will pay the broker only when the actual allotment is done. The usual margins will be applicable to the clients and brokers. In effect, it becomes an ordinary stock markettransaction, only the client is purchasing the new shares of the company instead of buying existing shares. Shares could be purchased in the demat form as well, in which case the client's account with the depository will be directly credited.

Senior executive director of Sebi, OP Gahrotra in a seminar on bookbuilding here said that the system itself manages the risk and the onus on the merchant bankers and lead managers is considerably reduced. Sebi is understood to be studying this proposal.

This move could also put a stop to the financing of IPOs, which is in vogue as small investors are sure of getting some allotment only if they apply for a large number. Multiple applications also serve as a conduit for large investors to make a back-door entry. "Proponents of fixed price issues have a vested interest in ensuring that the game continues," Kotak said.

Gahrotra talked about making electronic bidding mandatory, not only in case of book building but for all IPOs. At present, electronic bidding isvoluntary and not compulsory.

The Sebi official said that in its bid to streamline the book-building process the markets regulator was interested in an arms-length relationship between those involved in the book-building and their associates. In other words, associates or anyone connected with the lead managers and promoters in any way should not participate in book building. In the Indian context, companies float mutual funds which take part in the bidding process.

Uday Kotak of Kotak Mahindra said that it was necessary to avoid conflict of interests during book-building and maintain the integrity of the process. "Anybody with a vested interest in book-building should be kept out of the process," he said. Gahrotra said that one option which could be explored was a lock-in period for such associates. In the United States, where book-runners and issuers have total discretion to issue shares, there are stringent restrictions over who can participate in the bidding during book building. Kotak said that suchdiscretionary powers might not be feasible in the Indian context.

Kotak urged Sebi to ensure that in a public offer, at least 25 per cent should be made available to the public, through the fixed price offer. Sebi regulation required that a minimum 25 per cent of the securities should be offered to the public. However, in a later clarification Sebi, said that for issues of Rs 100 crore and above, 100 per cent book-building could be resorted to and the 75:25 ratio was optional.

Kotak also warned about the "export of domestic markets" in the sense that the price of a scrip in the domestic market is affected by its price in the overseas market.