These rules need changing

Last March, when Cairn of the UK announced that it would list its Indian subsidiary locally, it appeared to be a victory for the Indian stock market. Unlike other companies from overseas, the Indian operation was Cairn UK's largest. Indeed, now that Cairn UK has offloaded stock on to the Indian market, the IPO price of Rs 160 gives Cairn India a market value that, at over $6 billion, is more than what Cairn UK's market capitalisation was in March 2006, when the British parent announced a separate listing of the subsidiary. The reason cited at that time was that Cairn Plc wanted to remain small, focus on exploration, and separate the exploration and production businesses. Was better pricing in India also one of the objectives? The Indian stock market has been among the top-performing markets in the world, and since there aren't similar companies listed in India (except for the public sector giant, ONGC), the company might have thought it could get a better price locally rather than by raising funds for the parent in the UK.

All of this presents an interesting backdrop to the way the IPO played out the week before last. The issue barely scraped through. It is true that the stock market tanked on the day the issue opened, but the Sensex had also recovered before the issue closed. Analysts have argued that the IPO was aggressively priced. Cairn will start production in 2009, and what the global crude oil price will be then is uncertain. Second, analysts estimate that Cairn's crude oil, which is waxy, viscous and heavy, will trade at a 6-8 per cent discount to the benchmark Brent crude. There is the bigger risk of who will pay for the pipeline for the crude to be transported, and if Cairn has to build it, as is likely, this could increase the capital cost for Cairn by $400-500 million. Also, whether ONGC or Cairn will bear the burden of cess payment to the government is not resolved.

But the real questions concern the manner in which the IPO was handled""and the issues raised by this are those that the stock market regulator should look into. In what is known as the book-building process, unlike retail (and other non-institutional) investors, who have to bid at the cut-off price and cough up the entire bid amount, the qualified institutional bidders have to shell out just 10 per cent of the bid amount and pay the remaining 90 per cent only at the time of allotment. While QIBs cannot withdraw their bids, they can reduce the number of shares and price to Rs 1 lakh, which is as good as withdrawing their original bid. No retail investor has such an option.

As things panned out in this particular case, the issue was declared to have been over-subscribed for the institutional portion on the opening day itself. There is no doubt that such announcements influence many retail investors, who conclude that an over-subscribed issue might list at a premium to the issue price, and therefore put in their bids in the hope of a quick return. In the Cairn issue, however, what was an over-subscribed issue from Day 1 suddenly became less than fully subscribed midway through the closing day of the issue""and the numbers suggest that something like 40 per cent of the bids put in by QIBs were withdrawn. In the end, the issue managed to scrape through with the help of retail bids that had been put in on the last day.

The question that this sequence of events raises is whether there was any collusion between those promoting the issue and the institutional investors who first put in bids, only to withdraw them at the last minute. In other words, was the illusion of a successful issue created in order to draw in retail investors? Given the cross-border nature of some of the investors, Sebi may never know the answers. But it should certainly ask the questions, and review the IPO rules for institutional investors.