PSU issues: BSE gets its maths wrong

Bourse admits subscriptions to all book-built issues overcounted, blames software.

The government's offer for the sale of 10 per cent stake in the Oil and Natural Gas Corporation (ONGC) is said to have been subscribed almost seven times yesterday.

The subscription levels, however, could actually be much lower. Bombay Stock Exchange (BSE) executives told Business Standard yesterday that there was overcounting of subscriptions in all book-built issues. They, however, could not give an estimate of the overcounting.

There had been 34 book-built issues so far, merchant bankers said, and each of these could have encountered such a problem. This also applies to the massive subscriptions quoted in the five recent PSU offers for sale.

The Dredging Corporation of India issue is said to have been subscribed 13 times, the CMC issue 11.3 times, the Gail issue 8 times, the IPCL issue 3.16 times and the IBP issue three times.

The Power Trading Corporation issue, which closed on Monday, is said to have been subscribed a whopping 45 times. But there has been overcounting of subscriptions in all these issues.

BSE executives said the problem was with the exchange's software, which could not discriminate between multiple bid options.

For example, if an investor marks a demand for 1,200 shares at Rs 100, 1,500 shares at Rs 80 and 2,000 shares at Rs 60, keeping the total commitment at Rs 120,000, the system reads it as a cumulative demand for 4,700 shares at the lowest bid price.

This is irrespective of the fact that an investor will be allotted only one of the three options, according to the discovered price.

"This problem has been encountered in other PSU divestment programmes as well, whereever multiple options were allowed. It is not true about the ONGC issue alone," an executive said.

"In view of the debate arising out of the ONGC issue, the exchange will be looking at incorporating suitable changes in the software to net out the multiple applications," he added.

Market sources said the "oversubscription" business was as old as the book-building system, introduced in 1999. Every book-built issue that gave multiple options to investors might have shown inflated subscription numbers as there was never a system of netting off subscriptions, they pointed out.

"It was never an issue. Suddenly one quarter has woken up and is saying this about the ONGC issue to belittle the government. Dozens of book-built issues in the past may not have been oversubscribed as projected. But no question was ever asked," said a broker.

BSE executives also insisted that the problem was not unique to the BSE.

National Stock Exchange Managing Director Ravi Narain, however, said: "Our system is not the same as the BSE's and there has not been any overcounting."

Incidentally, the BSE and NSE posted vastly different figures in the first week of the public offers, which opened on February 20.

Three working days after Divestment Minister Arun Shourie said the government would investigate the cause of the drop in stock prices of PSUs that were being divested, the BSE and NSE websites quoted numbers suggesting that the IBP offer was not yet fully subscribed, though merchant bankers said the offer was sold 1.1 times.

Even today at 8 pm, the BSE site quoted a subscription level of 6.15 times for the ONGC issue. The NSE, on the other hand, quoted 3.74 times.

The book-building process begins with investors marking their options (quantity and price) in the form. The book runners to the issue collect all the forms and send the data to the stock exchanges via a terminal provided for the purpose.

The exchanges update this information on a near-real time basis so that subscribers and investors have an idea of the position of the book. The data also give details of the price at which the bids have been made.

All categories of investors are allowed to exercise these options. While qualified institutional buyers may not exercise this option, high net worth individuals and other retail investors do so to increase their chances of allotment under the proportionate allotment system.

Merchant bankers to the various offers had mixed reactions when confronted with the overcounting issue.

Senior Kotak executives said they were aware that there was something wrong with the BSE's system and that its figures were exaggerated. DSP Merrill Lynch officials refused to comment.

BSE executives argued that their job was to get the data and have it published and not to analyse it.

"This software has been used for all book-built issues. But the overcounting problem has never cropped up before," said a senior executive.