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BW Businessworld

The Second Chapter

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This was one of the matters we were seized with when I was taken into the finance ministry in 1991. My view was that there was no justification for the cross-subsidy, and that companies should sell shares to the highest bidders. That would eliminate the profits arising from underpricing, and all the attendant corruption. Manmohan Singh agreed with me. Share issues came to be auctioned, and the entire allotment process was cleaned up.

But in the meanwhile, Sebi had been created in 1988, and had nothing to do. Its chairman, G.V. Ramakrishna, was twiddling his fingers. I felt it would be better for the finance ministry to leave governance of capital issues to Sebi. So it was empowered. Initially, it continued the clean method of auctioning shares. But six years later, it reintroduced allocation of IPOs to reward the qualified institutional investors it had created, and to court retail investors. And with rationing returned underpricing, profiteering and corruption.

Rupalben made hay out of the underpricing of Yes Bank and IDFC issues in 2006. She came to the notice of Sebi, which in panicky self-righteousness asked National Securities Depository, then headed by C.B. Bhave, to “disgorge” Rs 15 crore because it had not detected multiple applications. NSDL appealed to Securities Appellate Tribunal, which completely exonerated it on 15 January 2009, as it did other firms and institutions Sebi had punished; it said that Sebi had relied entirely on NSDL’s own records and disclosures when punishing it, and asked how it could use all NSDL’s information and reject the explanation based on it.

When P. Chidambaram, finance minister, called Bhave to Delhi to offer him chairmanship of Sebi, Bhave asked him how he could be the accused in the proceedings against NSDL filed by Sebi and at the same time its chairman. Chidambaram told him he would be chairman in all matters except that of the NSDL and multiple applications.

The two men whom Sebi had appointed to look into the 2006 scam apparently gave their adjudication order to Sebi in December 2008. It blamed NSDL and asked it to strengthen its systems. Sebi’s practice is to publish such orders immediately and act on them; in this case it did not. Last month, one of the two panelists complained to the press and said that the delay in putting its order on the Sebi website was against the law.

That has set the stage for a blame game in which various opinionists are accusing various people in power in Sebi and the finance ministry of impropriety. But no one, absolutely no one asks just why buying shares cheap in a public issue and selling them at a profit is wrong. It is wrong because Sebi says so. There is nothing morally wrong with it; people buy cheap and sell at a higher price all the time. That is what capitalism is about.

And no one asks why Sebi made reselling illegal. It did so because it underpriced issues: it rationed issues, refusing to see that rationing is inseparable from underpricing. Rationing rewards qualified institutional investors and retail investors. But there is nothing right or moral about it; in fact, it creates a black market, it is absolutely immoral.

This is why we had abolished it, and that is why Sebi must abandon it now and return to a clean auction of public issues. It should say that it was wrong in reintroducing rationing. But if it does so, Bhave will be accused of exonerating himself. This is why Manmohan Singh must take time off from his exalted concerns, say that he was right to abolish rationing in 1992, and order Sebi to abolish it once more. That is what a Prime Minister is for — to take right decisions that his subordinates cannot take.

The author is Consultant Editor of Businessworld.
ashok dot desai at gmail dot com

(Businessworld Issue Dated 27 April-04 May 2009)