The last six months have been largely uneventful in a capital market that has been in a correction phase. Against this backdrop, the new Securities and Exchange Board of India (Sebi) chairman, CB Bhave, has trained his sights on primary market and mutual fund reforms, and the introduction of currency futures. The primary market in particular has sometimes looked like an organised lottery. Issues were oversubscribed 50- or 100-fold. A rampant grey market had emerged. Stocks would list at unrealistically high premiums and then suddenly lose momentum. And, investors’ money would remain blocked as share allotments usually amounted to only a small percentage of those applied for.
In response, Mr Bhave has questioned the need for retail investors’ money to leave their bank accounts till allotment. He has announced a pilot project, wherein the retail investors’ money will be blocked in his bank account to the extent of the bid amount, and on allotment the bank will transfer only the amount for allotted shares, and free the remaining funds. The Sebi chairman also wants to cut the IPO allotment process to 3-5 days, from the present 21, and towards this end the application process can be made electronic; the allotment is already in demat form. Meanwhile, QIBs have so far shelled out only 10 per cent of the bid amount with their IPO applications. Mr Bhave wants them to make full payment of their bid amount along with the IPO application. This should result in better price discovery, and the grey market can be killed.
Relaxing the rules for rights issues and qualified institutional placements (QIPs) is another step in the right direction. The Sebi chairman has allowed companies to price QIPs on the basis of the average price of two weeks before the issue, against the earlier requirement of taking the higher of the average six months’ or of the average 15 days’ price. He has also reduced the time taken to complete a rights issue from 109 days to 43. Both steps will enable companies to raise funds more easily. The introduction of currency futures and interest rate futures will now introduce a wider bouquet of products. As for mutual funds, Mr Bhave has set up an advisory committee headed by S A Dave, a former Sebi chairman, to go into the outstanding issues. The direct investment route in mutual funds, where the investor will not bear any load, has not taken off. Thus, there may be a need for a change in the compensation of the distributor, which should shift from the fund house to the investor. Meanwhile, legalising load rebate will ensure efficient pricing for the mutual fund investor, to the extent of the services offered by the distributor.
What else? Sebi has been slow in penalising offenders. With consent orders becoming a reality, especially after the Nissan Copper case, Sebi needs to figure out how the investor at the short end of the stick gets his dues. And in a globalised capital market, Sebi needs to worry about not letting the market shift out of the country, be it in participatory notes or Indian futures trading on overseas exchanges.