Until June 19, the extent of over-subscription in the Maruti initial public offer will not be known. Per Rs 100 share, Suzuki agreed to underwrite the IPO at Rs 2,300 per share. But the Rs 100 shares were split into 20 of Rs 5 each, thus establishing the floor price of Rs 115 a share. 72.2 million shares are on offer, reducing government stake in the joint venture from 45.8 per cent to 20.8 per cent. Through a book-building route, 60 per cent of the IPO is for qualified institutional buyers on discretionary basis, 15 per cent for non-institutional high net-worth buyers and 25 per cent for retail investors. A priori arguments about whether Rs 115 is too high have now become dysfunctional. Against Maruti’s market share of 55 per cent and high price-earning ratios today, there is the counter-argument of future competition and outdated technology for Maruti-800. Clearly, markets believe the argument rather than the counter-argument. The over-subscription multiple is already 4.19 times and by the time the offer closes on June 19, may well be closer to 10. Mr Arun Shourie and the disinvestment ministry have every reason to be elated with the first disinvestment effort of 2003-04. The debate about privatization through strategic sales as opposed to IPOs leads nowhere, as the answer depends on the sector and the company. While strategic sales maximize value for the government, IPOs broad-base support for the process. Much recent controversy over privatization concerned non-transparency associated with strategic sales, and it is welcome that the Maruti IPO has broken the identification of privatization with strategic sales.
This augurs well for IPOs of the National Aluminium Company and Bharat Petroleum Corporation Limited that will follow, although a caveat is in order. Markets have demonstrated that there is no dearth of liquidity, even if the IPO crosses Rs 800 crores. There is a dearth of good scrips and good companies. While NALCO and BPCL are healthy companies, they lack the identification of a strong strategic partner that Maruti possesses. One should not pre-judge the NALCO or BPCL success, especially because there is suspicion that the government is loath to relinquish control even when disinvestment occurs.
However, this does not detract from the present success of the Maruti IPO in stimulating both primary and secondary markets and generating interest among investors, both of the institutional (foreign and domestic) and retail variety. After being dormant for years, the primary market now shows some signs of recovery, thanks partly to public sector banks. But, especially for retail investors, returning to the capital market (something the Union budget also pushes) is a function of corporate governance. After the Naresh Chandra committee’s report, the new amendment to the Companies Act does seek to improve governance. But in the mid-Nineties, vanishing companies, non-banking financial companies, plantation companies and fraudulent promoters often took retail investors for a ride. There is not much evidence yet of the guilty having been brought to book. Regulatory oversight must improve if the Maruti success is to be replicated.