The Securities & Exchange Board of India (Sebi)s attempt to permit 100 per cent book building in primary issues has received another set back with the Primary Market Advisory Committee which met last week also turning down the proposal in its present form.
The Sebi chairman has however been granted time to rework the proposal to the satisfaction of the committee.
The committees fundamental objection is that the present condition of the primary market is directly attributable to the absence of the retail investor.
One hundred per cent book building of issues is only seen to accentuate this situation.
Sebi has indicated that it would be able to come up with a logical justification for permitting public issues to be sold entirely through the book-building route.
At present, book building is permitted, but only up to 75 per cent of the total issue, making it mandatory for the issuer to offer 25 per cent of the shares issued to the public.
This is the second time that the proposal in its present form is being rejected.
The proposal had met a similar fate some time ago when it was raised at a Sebi board meeting, where the capital market regulator had been unable to effectively convince the members that the move would be in the public interest.
Members had opposed the proposal as it was feared that permitting 100 per cent book building of issues would further distort the complexion of the already distorted primary market.
100 per cent book building in primary issues is a common practice abroad and is based on the rationale that the promoter\issuer has the right to decide the quality, class and composition of people who would form its shareholders.
The basic premise here is that only if the shareholders are like-minded people will they be able to understand and participate in the promoters vision for the company.
The conglomeration of like-minded people ensures that a companys management need not deal with the contingency of taking on its shareholders at the AGM, where corporate plans can be effectively blocked by motivated shareholder cartels, which is not uncommon in India.
The only limitation that is placed on 100 per per cent bookbuilding in issues abroad is that the capital market regulator prescribes a minimum ceiling on shareholders per issue while leaving the selection process of shareholders to the company.
This model falls within the paradigm of an institutionalised market, consisting of two segments - the wholesale market which includes the institutional investors and the retail segment being serviced by the mutual funds.
A formal format for the institutionalisation of the Indian capital market was laid under the chairmanship of late S S Nadkarni and several steps have already been taken in this direction.
However, the market imperfections have thrown up certain issuesan inefficient mutual fund industry has been unable to efficiently mop up small investments, resulting in the drying of funds flowing into the primary market.
Legislators fear that any further attempt to institutionalise the market would only accentuate the exit of the retail investors, which could prove to be detrimental to industrial growth.
The 100 per cent book building proposal is seen ensuring further marginalisation of retail investors on the stock exchanges in the country.
