Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

December 24, 2000

The futility of SEBI’s advisory committees

Investors who participated in the primary market madness of 1993-96 have not forgotten the money they lost when hundreds of companies vanished into thin air after raising public funds. These investors are still sore at the finance ministry, the Securities and Exchange Board of India (SEBI) and the Department of Company Affairs (DCA) for failing to bring unscrupulous promoters to book or to force them to disgorge their ill-gotten wealth siphoned away from the public. When SEBI invited investor groups to be part of its primary and secondary market advisory committees, it was to give them a voice and help protect investor interests. However, in practice, the meetings are a hodge-podge of committee members and invitees, so much so that both opinions and dissent are lost among the numbers.

For example, when SEBI decided to cut the minimum public offer size for Information Technology (IT) companies to 10 per cent (instead of 25) it was strongly opposed by several members, but the decision was carried on a majority vote. The three members who recorded their dissent were the finance ministry representative, the Consumer Education and Research Centre (CERC) and a Professor from the Indian Institute of Management, Ahmedabad. These members feared that the reduction in offer size would allow companies to raise money at a high premium and to maintain a high post issue price by keeping the floating stock low. However they were outnumbered.

SEBI then moved a proposal at its subsequent board meeting to extend the 10 per cent public offer norm to media, entertainment and telecom companies. The SEBI board cleared this with a rider that the number of shares to be offered and stipulated a minimum offer size of Rs 50 crore.

The basis of arriving at this figure is unknown and later events proved that it was inadequate. Prithvi Haldea of Prime Database, says that statistics collated by him shows that several companies who had taken advantage of this relaxation in minimum offer size had also vanished with investors funds. Yet, SEBI remains unfazed. At the next meeting of its primary market advisory committee, it mooted a proposal to extend the 10 per cent public offer concession across the board to all companies. That meeting was again a medley of committee members and financial sector invitees. The two investor representatives pointed out that they were in principle opposed to any dilution of the public offer size from 25 per cent to 10 per cent since it impacted floating stock.

However, since the concession had already been granted to ICE sector companies, they would support a move to extend it across the board only if the issue size was large enough to ensure an adequate floating stock. At this stage, Uday Kotak, Vice Chairman of Kotak Mahindra Finance, and an investment banker with wide experience in handling domestic and international issues suggested that the offer size should be a hefty Rs 250 crore. There were surprised murmurs around the table but only two investment bankers made a muted and half-hearted protest. The investor-representatives said that they supported the move because the suggestion had come from a well-known investment banker and was presumably based on his vast experience. The decision was noted without further discussion and subsequently released to the press.

Intriguingly, within 48 hours of the November meeting, a newspaper report quoting anonymous SEBI sources said that the regulator found the minimum offer much to large and was “mulling” a reduction to Rs 100 crore. This meant a drastic 60 per cent reduction over what had been agreed at the meeting. The question was, why did the SEBI official not voice his view at the primary market meeting? The two investor associations immediately sought a clarification and re-asserted their position that they supported a reduction in the public offer to 10 per cent only if the issue size was Rs 250 crore, and that they were otherwise opposed to any dilution of the public issue norms.

SEBI’s Sr Executive Director clarified that “as far as I am aware no further discussions within SEBI has taken place and we would be approaching the SEBI Board on the basis of the recommendations of the Primary market Advisory Committee recommendation of Rs 250 crore. Final decision however, rests with the SEBI Board”. Fair enough. However, there was another surprise. When the SEBI board met on December 22, the board members with uncanny precognition decided to ignore the primary market committees recommendation and hit upon exactly the same figure of Rs 100 crore which the news report had said SEBI was “mulling”. It must be pointed out that the SEBI board which swept aside the primary market committees recommendation, does not have a single experienced market player among its ranks. If anything, the finance ministry, SEBI and the Department of Company Affairs have failed to initiate credible action against industrialists who decamped with investors funds for over three years. Can one expect the SEBI board to explain the rationale behind their move? How did they decide that Rs 100 crore was the safe and optimum size for a public issue? Did they seek advice outside the Primary Market Advisory Committee? Also, why was the SEBI board in such a hurry to clear the proposal? If it disagreed with the Primary Market Committee, why did it not toss it back to it for further discussion? Let us not forget that the same SEBI board had confidently decided that it was safe to allow IT companies to go public with a 10 per cent float so long as the offer size was Rs 50 crore and they were wrong. This time, without access to any better advise, they have overruled the Primary committee and came up with a figure of Rs 100 crore.

If the SEBI board is wrong again, there is no problem; it will simply call another board meeting and tinker with the regulations once again. After all, the SEBI Board members are neither liable nor accountable for their decisions and many of them will not even be there at the next board meeting. As always it is only the investors who will pay a price.