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Sebi vigil on IPO pricing
Sebi vows to step up clean-up drive

Calcutta, May 9: Fresh from a round of fisticuffs with the alleged IPO manipulators, Sebi chairman M. Damodaran today said that the regulator was determined to clean up the primary market to protect investors and warned merchant bankers against unjustified pricing of bad issues.

“We want to bring in more first-time investors into the market, because it is the domestic investors who are going to drive the markets in the long run, not the foreign investors,” Damodaran said.

“A lot of money is now flowing into the capital market, from abroad, domestic retail investors and mutual funds. But, as of now, it is chasing few stocks. We need more stocks in the market,” he added.

As companies are making a beeline for the bourses with their IPOs, Damodaran cautioned that “Sebi is attaching great importance to the quality of IPOs hitting the markets”.

“The onus is now on investment and merchant bankers. They (merchant bankers) should work harder towards due diligence and disclosures of a company while pricing its initial public offering. If there is a huge difference between the issue price and the listing price or an issue goes wrong after listing, Sebi will not be on talking terms with the merchant bankers to the issue,” Damodaran said.

Sebi is also frowning at highly oversubscribed issues. “The book-building process is no great improvement in price discovery from the earlier system of fixed-price issues,” Damodaran admitted. “People used to apply for shares in multiple benami accounts then, they are also doing it now,” he added.

The Sebi chief said opening multiple demat accounts often leads to heavy oversubscription. He said Sebi would snuff out the manipulators by plugging the loopholes in demat accounts and tightening the noose around depository participants and merchant bankers.

The Sebi chairman insisted on companies getting their initial public offerings graded so that investors are made aware of the risks associated with the issue.

“We insist that the fees to obtain this grading be paid by the stock exchanges so that the information remain in the public domain and with the issuer. The grading should reveal the risk factors associated with the issue and not make a price recommendation,” Damodaran said.

“Our objective is to put in place right products, right processes and right people,” he added.

Damodaran also said that Sebi would regulate investment advisers, mutual fund distributors and portfolio management service providers.

The Sebi chief said mutual fund distributors are advising high net worth individuals to churn their portfolios by unfair means. “We have already asked Amfi to look into this,” Damodaran said, adding that Sebi will soon bring them under its supervision.

Depository receipts

Damodaran said the regulator would introduce the long-awaited Indian Depository Receipts (IDRs) this year to facilitate foreign companies to raise money from the Indian market and get listed on the country’s bourses. He said the Company (Issue of Indian Depository Receipts) Rules, 2004 and the disclosure norms need some changes.

“Besides, we don’t want to look at the issuer’s dividend track record, but its growth and profit volume. The relevant changes will be done and the IDRs will be allowed this year itself,” he said.

PAN tracker

The market regulator has recommended to the Central Board of Direct Taxes (CBDT) some changes in the PAN application form to ascertain more correctly the identity of the applicant.

However, only ‘qualified institutional investors’ (as classified by the market regulator) and investors who can invest a minimum of Rs 5 lakh, will be allowed to subscribe to an IDR offering.

The Department of Company Affairs (DCA) notified the Companies (Issue of Indian Depository Receipts) Rules, on February 20, 2004. The draft IDR rules were proposed in 2002.

The IDRs are similar to American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). In an IDR, a company incorporated overseas issues depository receipts to Indian investors. The instruments can be listed on the domestic bourses and are fully transferable. However, the underlying equity shares of these depository receipts (issued by Indian depositories) remain with an overseas custodian, such as a foreign bank having operations in India.

“We stumbled upon an income tax official in Hyderabad who has been working on the subject of ‘identification’ for the last six years,” said Damodaran.

“He has done a study with the PAN in its current format in the state and has suggested that if a few more columns are included in the personal details section in the PAN application form, the identification accuracy will increase to 97 per cent from the current 75 per cent. We have recommended these changes to the CBDT,” Damodaran said.

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