Rectify now

Sebi needs to correct abuses of book-building process

The abuses of the book-building process in IPOs, including the creation of artificial demand, have been well-known ever since the process started in this country.

Not only do we have multiple counting of applications, but bids are also submitted by lead managers and their friends with a view to padding the book. The upshot is the investing public get a completely distorted view of the demand that has been built up for an issue.

Because of these reasons, the M S Verma committee had, in late 2002, recommended that the book-building process should be a closed one, i.e, the book should not be made public.

The Malegam Comittee recommended that qualified institutional investors (QIBs), who do not have to put in any money when making their bids, should be forced to put in a certain percentage of their bid as a margin.

Subsequently, Sebi's primary market advisory committee pointed out that, a lot of the oversubscription in book-built issues may be caused by the fact that QIBs can make a bid for any number of shares without having to substantiate their bids by a commensurate margin.

Thus, it appears that the oversubscription in the QIB portion may be on account of the absence of any margin money requirement than a genuine demand for the issue.

The members were also of the opinion that oversubsciption without margin money may amount to fraudulent oversubscription. The committee could hardly have put it more bluntly.

And yet, at the time of tightening the IPO norms, not only did the Securities and Exchange Board of India (Sebi) dispense with a margin for QIBs, but it also did not take into account the need to prohibit multiple counting of applications, despite its being an open secret.

Instead, Sebi stipulated that institutional investors not be allowed to withdraw their bids, in the hope that this would put an end to the creation of artificial demand.

However, the allocation is entirely in the hands of the lead book running managers, and, in the case of oversubscription, they can easily reject the artifical bids of their friends, thus letting them off the hook.

What needs to be done? The total bids received at various prices should be displayed, instead of adding them up and determining the extent of oversubscription, as happens today.

Should book-building be confined to QIBs? That's what happens in the US, where the QIBs distribute their allocation to clients after the issue. Any talk of oversubscription would be greeted with dismay, as the lead managers would be accused of underpricing issue.

In India, however, the QIBs are foreign institutional investors and mutual funds, who would not offload their allocations to retail investors.

That is the reason why retail investors too participate in book-building here. One solution would be to have 75 per cent of the issue book-built, and then offer the rest at a fixed price to the public.

This would let book-building take care of the price discovery process, while the retail investor too could benefit. As for inflating the book by artifical bids, it's time Sebi insisted on a margin for QIBs.

And lastly, investors should bid for an issue based on their assessment of the company, rather than on the demand, artificial or otherwise, that the issue attracts.

Madrid blasts and hotels

The Indian hospitality industry over the last eight months has seen an upsurge in performance as corporate travel budgets have grown and foreign tourist arrivals have surged 15 per cent. So, will Thursday's blasts in Madrid make a difference?

Past experience from large-scale terrorist attacks such as 9/11 and the Bali bombings have shown that occupancy levels at domestic five stars properties dropped 30-35 per cent for several months after these events.

And as these attacks took place in the peak tourist season, it became very difficult for the industry to recover. The Madrid terrorist attacks have taken place at a time when domestic five hotels have been able to achieve 80 - 85 per cent occupancy.

Analysts point out that akin to earlier terrorist attacks, this incident could result in Western tourists adopting a wait and watch attitude "" overseas holidays are delayed until stability returns.

Such a scenario could result in occupancy levels at domestic five-stars dipping 10-12 per cent in the next month or two. Foreign tourists currently account for 35-40 per cent of occupancies at luxury hotels.

Says Ravipalsingh Gandhi, hospitality consultant, "inbound tourism is often the first casualty as foreigners wait for stability to return, before enrolling in any big ticket holiday plans."

Hoteliers, however, are confident that the industry would be able to withstand any negative impact from the Madrid blast "" they point out that GDP has grown 8 per cent in the third quarter and it has lead India Inc to expand its travel budgets by 10 - 12 per cent.

Also with the country emerging as an outsourcing hub, the foreign business traveller segment has grown 20 -25 per cent in the second half of 2003.

Says Sanjoy Pasricha, corporate head - sales & marketing, Leela Palaces & Resorts, " Companies are spending more at our property, we don't expect that trend to reverse soon."

With contributions from Amritheshwar Mathur