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Wednesday, Jun 02, 2004

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Opinion - Editorial


`Irrational' intervention

THE LATEST NORM of the Securities and Exchange Board of India placing fetters on `stock splits' by companies before an initial public offer, with its stipulation that the face value of the share must be Rs 10 if the offer price is less than Rs 500 is unlikely to make investing in the stock market a more informed affair for retail investors. SEBI's new norms, which dilute the pricing freedom of issuers, imply that companies are using this route to enhance subscription to outrageously priced offers by the simple expedient of pegging the per unit of cost of these shares at an affordable level. Thus, a share with a face value of Re 1 offered at Rs 10 would garner more subscription than the same share offered at Rs 100 but with a face value of Rs 10 though future earnings on that scrip may not in itself, support such a valuation. But if the market is not perceptive enough, it is only investor education, and not stipulations such as these that are going to be relevant. In a spate of recent issues companies have come up with offers priced at less than Rs 500 and having a face value of less than Rs 10. But if the after-market behaviour of these shares is anything to go by, companies may have actually under-priced these offers, for the retail investors could have made a sizeable profit after listing.

The new norms are also jarring viewed in the light of the pace and direction in which SEBI has been moving. On an array of issues, its actions in the past seemed to suggest that it views Indian investors as having acquired a level of sophistication to handle complex `derivative' instruments. It initially allowed `index futures' and followed up with permission to trade in `single stock futures'. Yet, the logic of SEBI's latest action would indicate that it ought to ban trading in derivative instruments. A community that can be swayed into backing questionable companies merely because its shares are more affordable surely cannot be trusted to make more informed choices when it comes to valuation of derivative instruments? Harsh though it may sound, the fact remains that no regulator can presume to secure completely retail investors against all possible contingencies. Its brief must be to inform investors and hope that they interpret it appropriately. Anything more than that will mean enveloping the market in a cornucopia of regulations and making the transaction cost of raising resources that much higher which cannot be in the interest of investors.

Having said that, there are still many elements in the public issue process that need SEBI's immediate attention. These include subscription by institutional investors without paying any money upfront, discretionary allotment to institutional investors as opposed to proportionate allotment for non-institutional investors, counting of multiple bids and their disclosure by stock exchanges and the glitches at the registrar's end in recent public offers. Resolving such issues would go a long way in protecting the interests of investors in public offers. The stock split restriction is destined merely to adorn the rulebook, bereft as it is of any practical significance.

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