Monday, February 11, 2008

Case for a market mashup

So I say if IPOs are a game of chance, why wouldn't the regulators pass over the primary market and allow direct listing into the secondary market? The expression `secondary’ would be redundant then. SEBI might as well silence the grey market rumor mills that emit misleading signals to trap gullible investors. Let Book Running Lead Managers (BRLM) morph into Market Makers. The mechanism could be something like this –
    1. The issuer approaches a merchant banker who shall prepare an offer document in compliance with regulations and ensuring adequate disclosures.
    2. The draft offer document shall be filed with SEBI for vetting and the final document shall be filed with Registrar. (No need for application forms with non-readable disclosures necessary. Imagine printing cost savings.)
    3. The market makers (BRLM in new avatar) shall provisionally register the securities with the depositories and offer a mandatory online two way quote to interested investors for a five day period.
    4. If there is enough demand for the security, the entire issue will be subscribed and if not, the unsubscribed portion (above a minimum watermark of say 70% of issue size/volume) shall be extinguished.
    5. Issuer shall have the option to pull out the issue at this stage if it is not happy with 70% subscription and credit the sums back to investors online/offline. Alternatively, if the market makers have agreed in advance (hard underwriting) to absorb the 30% unsubscribed portion at the closing price of the 5th day, they can.
Advantages are –

  • Significant reduction in issue expenses;
  • Online access to offer document. Facts don’t get mired in fine print;
  • No categorization of QIB, HNI and Retail;
  • The whole issue completed in 5 days, unlike 8-9 weeks that it takes now;
  • All category of investors to pay the full price they bid; No question of revised bids. Make a mistake, you just will have to buy/sell.
  • Being a transparent online mechanism, no scope for payment default since there is an instant direct debit to investor’s bank account;
  • Case for refund only if the IPO is subscribed below 70% or if the issuer chooses to pullout;
  • Efficient price discovery since price is what an investor is willing to pay and grey market operators get edged out;
  • Investors don't get sucked in by the media blitz following QIB oversubscription figures;
  • The reduced effort of BRLM would enable them to charge lower fee from issuers.

In essence, by applying the excellent secondary market infrastructure that we have now (with T+2 settlement) and the prevailing low brokerages, this mechanism is significantly more efficient, issuer and investor friendly and certainly a game of surety than of chance. No more bad listings; No more sudden pullouts.

Mr.Damodaran, if you need help, you know whom to call. Here are some more perspectives from Samir Barua (IIM-A), Rashesh Shah (Edelweiss) and Alok Vajpeyi (Dawnay Day AV).


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