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Retail investors get the reward

Calcutta, June 21: The government will be cherry picking the institutions allowed to pick up a stake in Maruti Udyog after the just-completed initial public offering (IPO), making a travesty of the entire book-building process.

Under the terms of the Maruti IPO, the government was supposed to allot up to 60 per cent of the 7.2 crore shares it was selling off to the qualified institutional bidders (QIBs) — or banks, financial institutions, mutual funds and foreign institutional investors among others.

But after the overwhelming response to the issue, which was oversubscribed almost 10 times, the government decided to reward the retail investors who had reposed faith in the government’s divestment programme.

It has now been decided to scale back institutional allotment to 40 per cent and offer 60 per cent to the retail investors (including the high net worth individuals who have applied for more than 1000 shares).

The market welcomed the move to allot more shares to retail investors than institutions. “Institutional investors that did not manage to pick up shares from the IPO, would seek to acquire the stock from the market on listing,” said a senior broker.

It now transpires that there will be little transparency in the way the Maruti Udyog’s shares will be allotted to the institutions. The merchant bankers are expected to complete the allotments by Sunday.

Each institutional application is being examined separately and the shares will be allotted to an institution only if the merchant bankers, the government and Maruti Udyog welcome the bidder as a shareholder in the company.

This implies that allotment is not guaranteed even for the best bid, which goes against the canons of book-building, says an observer. But the point of analysing each institutional application is to eliminate those investors that could, for instance, park stocks for a competitor and eventually make an attempt to destabilise the management of the company, merchant bankers explained.

A senior merchant banker says, “There is no laid down formula for the ‘discretional portion’ of an IPO, and it is completely subjective. Hence, there’s no transparency in the process either.”

Even more remarkable is the fact that the shares are being allotted to each investor, both retail and institutional, at the same price — Rs 125 — though institutions were required to quote a definite price.

Several bids were made above Rs 125 — the cut-off price determined today by the inter-ministerial group — with some going all the way up to Rs 390. Normally, one would have expected that the bidders who quoted the higher price would have to buy the shares at the quoted price; that is the usual global practice.

But in the case of the Maruti IPO, the allotment price has been determined on the basis of the price at which there is the maximum concentration of bids — in this case Rs 125.

In the case of allotments to retail investors, the allotment will be made in proportion to the total number of applications.

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