Sebi sees light, finally

Institutional investors can no longer 'rig' IPO allotments

The Securities and Exchange Board of India (Sebi) has finally scrapped discretionary allotment for institutional investors in initial public offers (IPOs).

Like other investors, even institutional investors will now be allotted shares on a proportionate basis. What's more, these investors would now have to pay a 10 per cent margin along with their IPO bids.

Since institutional investors did not have to cough up funds while bidding earlier, the rigging of IPO books was rampant. Most IPOs got sold out within a few minutes of the book opening, primarily because of aggressive bidding by institutional investors (in cahoots with merchant bankers).

All this will now stop - few investors would be keen on blocking funds just to rig the IPO book. As the rigging would be curbed to a large extent, the demand for a particular IPO would be much more realistic. Retail investors would obviously benefit. Further, they can now use the mutual fund route to get an exposure to IPOs.

A 10 per cent margin requirement would have been enough to deter frivolous bidders. However, Sebi also wanted to ensure that all institutional investors who bid are able to get a share of the pie.

Clearly, they do not believe the merchant bankers' spin that discretionary allotments help distribute the issue to quality and long-term investors. From now on, even the most short-term investor, like a hedge fund, would get an allotment in proportion to what it bids. That could make for a more volatile aftermarket.

Another lacuna remains. Stock exchanges, while reporting data on demand for an IPO, provide cumulative data for all the three separate bids given by investors.

Since these are alternate bids and not separate bids, it makes no sense to provide cumulative data. If all investors were to give three bids in one application form, counting all of them would mean that the demand is over-projected by at least three times.

Steel price hikes could be temporary

Domestic steel companies have recently indicated that they may revise prices upwards shortly. The rationale is that prices have already moved up marginally in Europe and the US. The outlook is, however, very different in China.

That's been underlined by the decision of Chinese steel giant Baosteel to cut prices ranging from 9 per cent to15 per cent for the September quarter. The reason is simple "" prices have been reduced because of the widening gap between supply and demand in the home market.

Steel production in China in the first seven months of 2005 was 193.8 million tonne, a 28.1 per cent growth on a year-on-year basis. In contrast, demand growth was at only 15.7 per cent in the same period, well below the scorching growth of 20 per cent in the previous two years.

Slower growth in demand is probably owing to steps taken by the Chinese government to cool off its real estate sector.

The concern is that China's steel capacity is set to reach 490 million tonne at the end of CY05 compared with the earlier forecast of 420 million tonne.

As a result, the threat of Chinese steel makers looking for overseas markets such as India to sell their steel appears to becoming a reality possibly in Q4 FY06. The development should also be accompanied by resulting pricing pressures in Indian markets.

No doubt, domestic integrated players have long-term contracts with customers, but if spot prices start to weaken once again at the end of CY05, it could force steel companies to follow suit. A hike in domestic steel prices, therefore, is likely to be temporary.

Inflation: stable in the long run

If we step back a little from the week-by-week inflation numbers and consider the disaggregated data over a longer period, there are a few interesting trends.

The index for primary articles, for instance, is now at a lower level than what it was a year ago. That's entirely owing to non-food products, prices of which have fallen by 6.4 per cent.

In contrast, the index for food products has risen by 2.5 per cent. That rate of increase is more than that for manufactured products, prices of which have moved up by a mere 2.2 per cent in the last year.

Yet another price index that has declined over the past one year has been that for minerals, which is lower by 2.9 per cent. In fact, it's only the fuel index that has shown a big rise""-it is up 9 per cent y-o-y.

What if we take a 10-year view? Compared with end-March 1995, the WPI for all commodities is up 65.8 per cent, with the biggest rise being in the fuel index, which has risen 178 per cent, closely followed by the minerals index, up 156 per cent.

In contrast, the index for non-food primary products rose a mere 33.1 per cent in the decade, food products prices rose 68 per cent, while manufactured products index rose 45 per cent.

Inflation should start rising again from December, when the impact of the base effect wears off. But the longer-term trends indicate that structural changes in the economy have ensured that inflation for both manufactured products and non-food primary articles is likely to remain subdued.

With contributions from Mobis Philipose and Amriteshwar Mathur