The Hindu Business Line : Palak and paneer don’t jell

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Palak and paneer don’t jell

S. Murlidharan

Palak paneer (spinach gravy with cottage cheese) is a North Indian delicacy that tickles the palates of people across India. But dieticians say that while it may be a lip-smacking dish, it can harm one’s digestion because while spinach is rich in iron, paneer is rich in calcium and the two don’t really jell, resulting in failure of absorption of both by the body.

What has this gastronomic and nutritional vignette got to do with the world of finance? Well, something similar is happening in our primary market. The corporate economy needs foreign money as well as public participation to revive the equity cult that was dealt a body-blow by the global financial meltdown of 2008.

If foreign money is iron, public participation is the much needed calcium for the Indian corporate economy. It cannot do without one or the other. But, then, a combo dish needs to be prepared carefully so that there is food synergy. Mixing of incompatible ingredients, though individually desirable, proves counterproductive and causes anergy (lack of energy).

Much the same is happening in the primary market. Foreign institutional investors (FIIs) have been made the lynchpin of both the primary and secondary markets, though they are known by a different name — Qualified Institutional Bidders (QIBs) — in the primary market when they participate in the book-building exercise touted as an efficient price discovery mechanism but whose efficacy remains remained suspect in the eyes of both retail investors and cognoscenti.

Retail investors’ grouse

The grouse of retail investors is that the QIBs are the ones that make listing gains in the absence of any lock-in period, leaving them (retail investors) holding the can. But SEBI seems to have a diametrically opposite take. It has put in place a regime under which allotment of shares to retail investors is made at the price discovered by the QIBs in the belief that an issue vouchsafed by the redoubtable QIBs is the best insurance for the retail investors.

SEBI has prescribed a combo pack which is supposed to carry forward the interests of everyone — the economy, the company, foreign investors and the public. Like palak-paneer, the recipe indeed appears lip-smacking but has been singularly responsible for the sorry state of the primary market.

The market regulator needs to revisit its strategy. It is not enough to anoint one of the QIBs as an anchor investor, as it proposes to do, with a mandate to stay put with the shares its has subscribed to, at least for 30 days following listing.

There is no reason why the public should enter untested waters merely because the QIBs have reposed faith in the company, especially in the absence of any lock-in period or mandate to guard the price-line for a reasonable length of time by offering a mandatory and meaningful safety net mechanism.

In other words, offer of shares to retail investors must be decoupled from the issue of shares to QIBs. Let the public have the benefit of observing the price movement in the bourses for, say, six months, after which the shares meant for the retail investors can be offered at the average price that prevailed during these six months or the one paid by the QIBs, whichever is less.

Such a dispensation alone would be fair to retail investors because they should not be made to toe the line taken by the more fleet-footed but well-heeled QIBs. The QIBs must be called upon to play a dual role — should the public spurn the shares offered to them, pro tanto the QIBs would have to act as underwriters after having played the role of investors.

The Finance Minister, Mr Pranab Mukerjee, in his Budget 2009 speech, has announced that soon, public participation in listed companies would be increased to a minimum 25 per cent from the present low of 10 per cent which indeed makes mockery of the public character of our listed companies.

He should direct the market regulator to simultaneously usher in the other much needed reform in the primary market — of separating palak from paneer so that individually imbibed they do good to the company, in particular, and the nation, in general.

(The author is a Delhi-based chartered accountant.)

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