I was amused by N Ramamurthy's letter to the editor, "Fix IPO prices" (November 4), seeking a Controller of Capital Issues (CCI)-type of pricing of initial public offerings (IPO). The CCI exited the domain of fixing prices 23 years ago.
Back then, the CCI had only two rules. First, an IPO could only be priced at par. But merchant bankers were smart. In the free-pricing era, IPOs that did not deserve a par price were not only sold at par but were also highlighted as such, thus attracting investors. The regulation that no share could be sold below its face value was twisted to extract reverse premium. This fooled even the Securities and Exchange Board of India (Sebi) for a considerable period.
The second rule was that for rights issues - there were few follow-on issues at that time - the CCI would decide the price. How? Through a convoluted, 'secret' formula that was so malleable that the CCI did not have the courage to show how it had fixed the price. In fact, several promoters begged the CCI for a lower price as they knew their shares were not worth that much - they had ramped the prices up before the record date - and did not want to put that much money into it or did not have enough accountable wealth to subscribe to their own rights quota.
To ask for the reinstatement of such an authority is laughable. But then, what should the Sebi do? It knows what is happening, but will never be allowed to do what is necessary.
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Back then, the CCI had only two rules. First, an IPO could only be priced at par. But merchant bankers were smart. In the free-pricing era, IPOs that did not deserve a par price were not only sold at par but were also highlighted as such, thus attracting investors. The regulation that no share could be sold below its face value was twisted to extract reverse premium. This fooled even the Securities and Exchange Board of India (Sebi) for a considerable period.
The second rule was that for rights issues - there were few follow-on issues at that time - the CCI would decide the price. How? Through a convoluted, 'secret' formula that was so malleable that the CCI did not have the courage to show how it had fixed the price. In fact, several promoters begged the CCI for a lower price as they knew their shares were not worth that much - they had ramped the prices up before the record date - and did not want to put that much money into it or did not have enough accountable wealth to subscribe to their own rights quota.
To ask for the reinstatement of such an authority is laughable. But then, what should the Sebi do? It knows what is happening, but will never be allowed to do what is necessary.
T R Ramaswami Mumbai
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number