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Losing sheen at the allotment stage

By C. R. L. Narasimhan

A successful issue season for the Government has been marred by some goof-ups at the allotment stage.

The ONGC mega issue of over Rs.10,000 crores was fully subscribed and should have brought credit to the Government, the issuer. A season of highly successful public issues would have come to an end, with no less than seven public offers representing government divestments sailing through. The fact that the Government went ahead and succeeded despite being warned against such a compressed timeframe is noteworthy. Yet the fact that though oversubscribed, a few of the public offers, including that of the ONGC, have still to be completed, takes some sheen off those claims. Specifically the post-issue mess in the case of ONGC has shown the allotment procedures — in a few other issues too — in poor light. ONGC 's issue received 1.45 lakh retail applications. Even as late as the middle of this week the allottees have not received the shares. Earlier, there has been a well-publicised allotment failure, again in ONGC, with the category of high net worth individuals receiving more shares than what they were eligible in terms of the allotment basis agreed upon.

The share issue of Power Trading Corporation was also delayed with the allotment formalities stretching endlessly. In all these cases it is the registrar who has been blamed. Out of the seven floats in government companies during March, MCS were the registrars in four — ONGC, CMC, IBP and GAIL — while the mandates for the other three — IPCL, Dredging Corporation of India and Petronet LNG — were bagged by Karvy. Both these firms are highly experienced in the field and would have won the mandates on the basis of their track record. However, even though all the allotment problems this season have allegedly been caused by MCS, it is the institution of registrars that has received all the negative publicity. That might be unfair.

An issue management is a collective effort involving several intermediaries, the company and the stock exchanges. Besides, the lead managers, who are by far the most glamorous of the intermediaries, have a definite responsibility in selecting the registrar (and other agencies). All market intermediaries including the registrars will have been registered with the Securities and Exchange Board of India (SEBI).

By no stretch of imagination can the pre-issue work is delinked from the post issue work. The latter, mostly the job of a registrar involves tasks such as collection of applications forms, data entry, finalising allotment procedures and so on. Those appear routine but as the ONGC episode shows can never be considered unimportant. A heavy workload, which the registrars had to undertake in a very short time frame, has allegedly contributed to the breakdown. If that is a plausible explanation the question arises as to why so much workload was assigned to one registrar, knowing full well the likely magnitude of the tasks. Was the selection made objectively? On the other side, it is likely that those selecting an intermediary, including the registrar, did not have much of a choice.

There has been a rapid decline in the number of qualified registrars having the wherewithal to take on an issue of the size of ONGC. Besides, was not the SEBI aware of the likely shortcomings in letting one or two agencies handle such a large volume of work in a very short time? The fact that the IPO market has been in a moribund state until a year ago meant that many intermediaries including registrars went out of business. Again, in common with brokers the registrars needed to scale up their businesses by bringing in additional capital and technology to remain in the field.

Traditionally, many of the registrar's duties were contracted out to much smaller entities. The work has always been labour intensive. Even now, with so much of technology adoption, the registrars' work continues to be so.

One last point: did the methodology of the public offers — all the March offers by the Government were through the 100 per cent book building route — contribute to the fiasco? It is not certain whether the registrar grasped the procedural aspects. Looking at the whole process from the perspective of retail investors, it is very likely that even the (better-equipped registrars could have faltered. For instance, for retail investors, the ONGC's cut off (the price at which the application was accepted) was fixed at Rs. 750. Retail investors received a 5 per cent discount and were advised to apply at the discounted price of Rs. 712.50 only. For the GAIL issue, on the other hand, the cut off was at Rs.195 and after the discount of 5 per cent the retail price was Rs. 185.25. However no applications below Rs.195 were accepted. Queries to the registrar, who handled both the issues, remain unanswered.

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