Indian IPO Market - Prospects & Challenges
(by R.Kannan)
(This article of mine was originally published in "ICFAI READER" issue of October 2004
published by The ICFAI University Press)

ONGC-Issue Allotment Fiasco
(Does the ONGC allotment fiasco, indicate that Indian capital market lacks
proper infrastructure to cope with large initial public offerings(IPOs))?

The ONGC fiasco resulted on the account of failure of one intermediary, the registrars to the issue. This has brought disrepute to the entire process. The Registrars in fact handle back office work. We, in India pride ourselves with capacity and expertise to handle the back office functions of several of the global players more efficiently and more competitively than they could handle at the foreign destination. We have a flood of business process outsourcing flowing into this country regularly from overseas MNCs. Could we then say we lack infrastructure for back office functions in the domestic sector?

How then can this phenomenon be explained? Look to the fiasco as a case of human failure, in the functions of planning and organizing and not due to lack of infrastructure. Whether the selection of the registrar was made objectively taking into account the constraints of a tight schedule? Post-issue work as a rule is more labour intensive. Technology to a large extent if applied properly can handle the job smoothly. Was it properly put in use?

With the public issues market having remained virtually dormant till this year, many intermediaries, including the registrars had gone out of business. One reason for the present post-issue fiasco can be traced to a lack of choice among registrars. But can this be deemed as dearth infrastructure? It is a case of failure of organizing the resources to carry out a task. We have the equipment and human resources for the successful handling of the job. But we need to plan effectively. Due to lack of demand there is shrinkage of the supply. These Mega Issues come first to SEBI and the Stock Exchanges for approval. At that point the market infrastructure had to be viewed and correctional measures could have been initiated. Messages should have reached to those who have closed their shop to come back. Market Development is the responsibility of SEBI and development of Intermediaries is the role of the stock exchange. There is no dearth of professionals to come forward and act as Registrar, if the volume of business is attractive. Employees to handle supporting tasks can be trained within 3 to 6 week's time. The real contributory causes for the fiasco is defective planning and organising. The volume of the task to handle is well known. It is customary for good public issues to be oversubscribed by 10 to 15 times in India. The issue is open for 5 days and allotment is to be completed and allotment letters/refund orders dispatched within 30 days thereafter. It is a fact that there was dearth of service providers in the area of Registrars to issue. Still several earlier issues including Maruti Mega Issue (though much smaller compared to ONGC) were handled successfully.

It is not only the responsibility of the Registrars M.C.S. Ltd. but also equally that of the Government while appointing them as Registrars to examine and satisfy that they are competent to carry out the exceptionally heavily loaded job. In the second instance, if they were not fully suited to the task at that time, could they take necessary steps to expand to the capacity needed, without sub-contracting good part of the job to assorted data-entry operators. It is thus not only that of the Registrars directly to be directly, but equally that of the government indirectly to have not selected competent registrars.

It is now not a mere post mortem exercise, but the issue has further to be analysed with a forward- looking approach. In the words of Sourav Majumdar "If the government, after the elections, is to keep the disinvestment process on a fast track and chooses to continue with the public offer route, the primary market infrastructure has to be strong enough to support the big plans. Clearly, the registrar community is currently the primary market's weakest link. While it may be argued that the goof-up by one registrar does not mean that the entire registrar community is not up to the standards, there are some aspects which need urgent attention."

The primary market has seen more money being raised in the past one month than what was raised perhaps in the last five years. While this is the potential task before the intermediaries concerned with IPO service, there are only very few big and quality registrars in the market today. There is an urgent need for more quality registrar outfits, now that business is hotting up.

These issues of PSBs will not just be sold to qualified institutional buyers (QIBs) alone. Retail applications will hold the key and most issuers and investment banks will now be pushing such applications in a major way. The total pure retail applications (of under Rs 50,000) for these mega government offers were to the tune of about 1.7 million, of which nearly one million was for ONGC alone. While the smaller bank IPOs also saw retail interest, the last few mega offers showed that retail investors are also coming in for higher priced issues. If the retail element is further pushed, which is probably the desirable thing to do, will the registrars be capable of taking this load and delivering the goods?

Registrars often outsource the data entry work to outsiders, and chances are that small, ill-equipped entities may take up this job. However, while the data entry job looks relatively less important, it can hold the key to the successful completion of the issue process. For instance, if a shoddy data entry operator mixes up a simple thing like the application amount and the allotment amount, it can cause havoc in the entire allotment process. Registrars concede that there will be situations where smaller entities pitch for jobs offering low rates, tempting registrars to pick them. However, opting for low cost outfits may end up compromising on the quality of the work. Hence, registrars need to be very cautious about who they outsource work to. The payment structure for registrars also needs to be delved into.

The ONGC goof-up may well be called a human error. But errors of this kind, even in one link in the IPO chain, can make the Indian primary market an international laughing stock. Indian markets cannot afford it. Not at a time when it's just hitting big time. Post-issue formalities are critical for a smooth conclusion to the entire process. And like the ONGC fiasco has shown, investors can be severely hit by such errors. How to organise the service-provider, Registrar's to issue and be sure that there would be zero level negligence or errors in work.

This issue is further discussed in the next issue relating to Registrars to Issue.