Page 31 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes government undertook a range of measures during the post-liberalization period to rev
up new issue market. Consequent upon these measures, the new issue market in India
witnessed phenomenal changes, both quantitatively and qualitatively, increasing depth
and sophistication of the operations of the market as also resilience of the market to cope
with the new economic challenges.
 Although the Indian new issue market compares well with other emerging economies in
terms of sophisticated market design of equity market, widespread retail participation
and liquidity, participation of FIIs, mobilization of funds through Euro issues, the growth
of the debt and equity markets remains low and largely skewed in comparison to the U.S.,
Malaysia and South Korea, indicating immense latent potential. Further, the new issue
market of the country continues to be shallow. Despite inflation, only 2 percent of Indian
household savings are invested in the market as against 20 percent in developed economies
and about 51 percent in the US.

 A host of factors has stonewalled the full-fledged growth of the new issue market of the
country. One such factor is inadequate disclosures of information needed by the investors
to make informed decisions regarding investment in new offerings. Despite the SEBI's
clear directives in this regard, Indian corporates are mostly indifferent in supplying the
required details. This has ostensibly eroded the confidence of the investing community.
 Overpricing of issues is another pernicious weakness of the new issue market in India
responsible for its stymied development. This created problem for the holders to exit
from the market. The major concern for the issuing companies at present is to fix the right
price of the issue. In fact, price discovery price is not perfect because of conflict of interests.
At present, a Dutch auction process for the institutional bidders, where the price band is
decided before the bidding begins, is followed. The French auction process works on the
principle of "Winner takes all". This follows a top-down approach where the highest
bidder gets the first allocation, followed by the second highest bidder and so on. The
French method can be used to determine the price offered to retail investors who could be
allotted shares at the lowest auction price or the average price. However, merchant bankers
do not seem to like the idea. With proportionate allocation, a French auction does not
make sense as there is no incentive for the institutional buyers. In a proportionate allocation,
irrespective of the number of shares or the price one bids for, any institutional bidders
that make the cutoff receive an equal number of shares among each other. The SEBI is
attempting to find alternatives to improve the pricing process.
 High transaction costs, that drive companies to other avenues for mopping up capital,
have also hampered the growth of the market.
 Due to the latest global financial meltdown, the new issue market has suffered grievously
with investors' confidence at its lowest ebb. To rev up the new issue market and sustain its
growth, it would be the much-needed measure to restore investors' confidence. For this
purpose, it is necessary for the SEBI to protect the investors' interests by making listing
requirements more stringent in phases so as to discourage the participation of unhealthy
companies in the new issue activity, installing an efficient institutional arrangement, and
directing the companies to adhere strictly codes of corporate governance.
 It will also be useful to offer a mechanism of safety net/exit option on new issues to retail
investors so that the shares at the issue price of the price of a share drops below a certain
level within a certain specified time. This will, besides exuding confidence among the
investors, induce the market to move to a more realistic pricing.
 Market making spread should be made compulsory at least for a period of 6 to 12 months
from the date of listing. This would go a long way in improving liquidity of the scrips.
Issuing companies and the syndicates should be mandated to sell the IPOs. Making adequate

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