The Hindu Business Line : Premium conundrum

It has now become infra dig to fix a premium that is anything less than 30 times the face-value, even for loss-making companies, so long as they can convince their merchant bankers of the bright future.

SHARE PREMIUM has become the subject matter of animated debate. — Paul Noronha

It is not only the spoilt brats at home who are getting whatever they want, even the corporates seem to be. Wannabe listed companies only have to tell the pin-striped executives of their merchant bankers their fund requirements, and presto it is delivered on a platter by the eager-to-please subscribers led by QIBs (Qualified Institutional Buyers).

Time was when companies would tell the Controller of Capital Issues the number of shares of the desired face value — Rs 10 or Rs 100 — they wanted to issue, leaving the question of premium to be decided by the CCI based on the financials of the company or the market quotation if already listed.

A premium of Rs 25 per share on an Rs 10 share became the subject matter of animated debate in cocktail circuits. But today such a premium is strictly for birds. It has now become infra dig to fix a premium that is anything less than thirty times the face-value even for loss-making companies so long as they can convince their merchant bankers of the bright future.

Having ordered, as if in a cafeteria, the funds requirement, the only thing to worry about for a company is the division by the primary market of this pie into share capital and share premium. Thus if you tell your merchant banker that you want Rs 10,000 crore, it is left to his ingenuity to determine how many shares would make up this pie.

If he is able to sell the idea of limitless future potential to the QIBs and garner a premium of Rs 490 per share, the number of shares to be issued would be only 20 crore. But if his overtures are spurned by the QIBs participating in the book-building exercise through which the issue price is discovered, the company need not lose sleep over it because now all that is going to happen is the pie would be divided into smaller slices — there would be as many as 500 crore shares.

That the mammoth quantity would make `servicing' of share capital difficult has never seriously bothered the buccaneer businessmen whose eyes are firmly on what they have ordered. With freedom to fix the face value as well so long as it is not less than Re 1, wannabe listed companies are having a field day. A premium of Rs 490 on a Rs 10 share may appear outrageous but not when the face value is fixed at Re 1 with a corresponding proportionate reduction in premium to Rs 49 per share.

Far from protesting, gullible investors unable to see through the trick, sing hosannas of such companies! What is more, they are also taken in by the claim that the shares now have become more affordable.

Things to do

Four things need to be done by the powers-that-be before it is too late:

Mandate payment of interest on the premium portion so as to bring about a modicum of sobriety in its fixation and, more important, to drive home the message that the aphorism `there is no free lunch' applies as much to corporates as it does to farmers and other less glamorous segments.

Don't allow QIBs, the movers and shakers of the primary market who enjoy the privilege of discovering the price, to pull out after ramping up the price. A bank guarantee for the entire amount of the bid alone would work.

Don't allow the promoters to dump their shares in the secondary market at the earliest opportunity, which is the listing day when the circuit-filter mechanism is suspended. After all a promoter who has subscribed to shares at face value has nothing to lose even if such dumping sends the price tumbling to half vis-à-vis the issue price.

Mandate a uniform face value across the board so that investors don't get lost in the maze of valueless faces! In fact many of them say resignedly if innocently and incorrectly that in the current milieu of free pricing, there is nothing like face value.

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