The Securities and Exchange Board of India’s (Sebi) letter to lead managers to stop enlisting 10 broking houses for future public issues has stumped the broking community.
Sebi’s February letter to six lead managers said the broking houses — referred as sub-syndicate members — which were unable to compensate investors who had not received Coal India shares despite legitimate bidding should not be enlisted for forthcoming public issues, till the matter is resolved.
The Rs 15,200-crore initial public offering (IPO) of Coal India (CIL) was managed by six investment bankers — Citigroup, Deutsche Equities, DSP Merrill Lynch, Enam Securities, Kotak Mahindra Capital and Morgan Stanley India.
Yesterday, the lead managers met Sebi officials to raise important issues on how to resolve this deadlock. With just about a month to go before ONGC’s IPOs of around Rs 14,000 crore is supposed to hit the market, top brokers obviously want things to be resolved fast.
Over 10,000 investors were unable to participate in the CIL issue in spite of submitting legitimate forms. Brokers blamed it on technical glitches, but Sebi has asked them to compensate the investors. According to industry officials, average amount per investor could be Rs 12,000 to 15,000, depending on the application size. That is, 10 top brokers have to pay a compensation of Rs 10-15 crore.
The amount per se is not an issue. But paying all consumers is. “We have been working on this for the last two months and paid 50 per cent of the investors. But there are some issues that we are trying to resolve through the lead managers with the market regulators,” said the president of a leading broking house.
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One of the main problem is that though applications might be from one broker, the investor might have submitted with another. “According to Sebi mandate, I need to compensate such investors as well. I am willing to pay customers where I have defaulted, but how can I pay others who have my form but have deposited it with another broker,” said another head of a broking house. Consequently, many have approached the investors but making payment, according to an acknowledgement slip.
Another issue causing worry is that this compensation for default does not have a precedent. Sebi’s order comes despite a disclaimer in the offer document which says “neither our company, the selling shareholder nor any member of the syndicate is liable to the bidders for any failure in downloading the bids due to faults in any software/hardware system or otherwise.” Investment banks and broking houses feel such compensation policies will hurt the industry in future. Most retail investors come in with applications at the last moment after taking into account the institutional investor’s response to the issue. “When applications are being uploaded till 12-1 in the night, there could be genuine mistakes,” said IPO head of an investment bank. Some investment bankers felt this issue could be resolved in 10-15 days. “We have been working on a war footing for sometime. But it is difficult to achieve 100 per cent success,” said the president of a broking house.
Tech solution
Sebi is in the process of modifying the online bidding mechanism that would reduce instances of brokers unable to upload bid details. Stock exchanges will soon provide stock brokers with an access to the online ASBA (Application Supported by Blocked Amount) mechanism wherein brokers will be able to key in the important details of the applicant including, demat account number, bank account number (where money will remain blocked) and the bid details.
Thereafter, banks that have access to the system will verify the account details and block the amount. This, according to market players, will drastically reduce the workload on syndicate members. Currently, all that a broker can do is collect ASBA form from the investor and deposit it physically at the bank where the investor has his account.