Current Economic Statistics and Review For the Week Ended September 15

o Area sown under Kharif crops during this Monsoon season (June 1 to August 1, 2005) has reached around 69 per cent of normal area, which is almost equivalent to the area sown in the previous year till the end of July. Among all Kharif foodgrains, acreage of pulses has recorded the maximum decline, which stood at 72.18 lakh hectares: almost 11per cent, as compared to previous year. Coverage under arhar, urad and moong fall short of their previous year coverage. This has been followed by rice registering a decline of almost 3 per cent at 196.60 lakh, owing to the shortfall in sowing reported in Uttar Pradesh, Chattisgarh and Orissa. Oilseeds kharif sowing is also down by around 2 per cent at 137.56 lakh hectares as against 141.02 lakh hectares in the previous year during . This shortfall is largely due to delayed monsoon. On the other hand, coarse cereals’ sowing, over the period of one year (August 1, 2004 to August1, 2005) , has improved almost by 12 % at 174.56 lakh hectares from 155.63 lakh hectares. This improvement has been attributed to rise in the acreage of Bajra up by 36 per cent and that of Jowar, up by 12 per cent. However Maize sowing is down by 2 per cent. All the major non-food crops i.e. Sugarcane, Jute and cotton have recorded an increase in their sown acreage. Sugarcane acreage has increased by around 10 percent at 41.34 lakh hectares. However, Jute and cotton, each has registered an increase of around 1 per cent each in their acreage at 69.37 lakh hectares and 7.88 lakh hectares, respectively.

o To save farmers from the clutches of private money lenders, the Government has advised the banks to increase agricultural credit flow at the rate of 30 per cent per year. Apart from this, it has also restructured the outstanding debt of the farmers by dividing them among different categories like Farmers in distress (farmers in the districts, which have been declared as calamity - affected as on 31st March 2004), Farmers in arrears (farmers who have become ineligible for fresh credit as their earlier debts have been categorised as sub-standard or doubtful but now are eligible for fresh credit.) It has also decided to waive the margin/security requirements for agricultural loans up to Rs. 50,000 and agri-business and agri-clinics up to Rs.5 lakhs, to grant a one-time settlement (OTS) including partial waiver of interest or loan to the small and marginal farmers who have been declared as defaulters and have become ineligible for fresh credit. All the Public Sector banks have been advised to reduce their lending rate for agriculture to a single digit rate of not more than 9 per cent per annum on crop loans upto a ceiling of Rs. 50,000.

o The Global Tea Market has agreed to abide by ISO 3720 to keep a check on the increasing supply of inferior quality tea at the global level. India is the only country that has already implemented this through its Prevention of Food Adulteration (PFA) norms for both imported and exported material. The decision was taken in the 16th session of FAO inter-governmental group conference. India has been authorised to work out the parameters for the Minimum Residual Limit (MRL) in tea, to be presented at the WTO.

o Reliance Life Insurance Company limited, a subsidiary of Reliance Capital limited, has agreed to acquire 100 per cent equity capital of the Chennai-based AMP Sanmar Life Insurance.

o Sluggish international demand and continuous fall in prices, forced steel producers Steel Authority Of India Limited (SAIL) and Essar Steel to cut prices by 3 percent to 8 per cent. SAIL has cut steel prices across all product categories between 4 per cent and 8 per cent. Essar has reduced price by 3 to 8 per cent across all its products.

o Larson & Toubro has announced its plans to set up a Greenfield manufacturing facility in China for the manufacture of high-end air circuit breakers.

o Mahindra & Mahindra’s total tractor sales stood at 5,384 units in July 2005, as against 3,350 units in 2004, reflecting a 60.7 per cent jump in tractor sales.

o Tata Motor Company’s motorcycle sales in July 2005 stood at 53,215 units as compared to 52,958 units in July 2004, an increase of 0.48 per cent.

o Voltas Limited has decided to close down its loss making plant situated at Hyderabad by the end of December 2005. The company also plans to set up another plant at Utteranchal to manufacture one million air conditioners with an investment of about Rs 60 crore.

o Reliance Industries Limited cleared the demerger of the company’s business by creating four new entities in the areas of telecommunications, coal-based energy, gas-based energy and financial services. These are Reliance Communications Ventures, Reliance Energy Ventures, Global Fuel Management Services and Reliance Capital Ventures.

o Basant Kumar Birla and Kumar Mangalam Birla signed an agreement to purchase a 7 per cent stake in Pilani investments from SK Birla and 20 per cent from CK Birla. With this buyout, the BK Birla group will become the largest shareholder in Pilani investments with a 49 per cent stake.

o ICICI Bank the largest private sector bank has announced that it will offer all credit cards free for life in an attempt to expand the credit card market. ICICI Bank will not charge joining as well as annual charges for new credit card customers and stop levying annual charges for its existing 35 lakh credit card users, except co-branded cards with Deccan Air and Kingfisher Airlines. The bank has decided to make all credit cards free so that the product reaches a wider population, as credit card penetration in the country was still very low.

o The Reserve Bank of India (RBI) has specified that three Singapore banks – Development Bank of Singapore, Overseas Chinese Banking Corporation and United Overseas Bank – will be granted licences to set up 15 branches within four years. These three banks will operate as wholly-owned subsidiaries in India, as per the Comprehensive Economic Co-operation Agreement signed between the two governments. According to the Indo-Singapore treaty, the Singapore government will grant permission to four Indian banks to undertake wholesale banking operations. This will be in addition to granting three Indian banks full branch status, wherein they would be permitted to carry on retail operations in Singapore including operating an ATM network. State Bank of India (SBI), ICICI Bank, Bank of Baroda and Bank of India are likely to get full branch licences. Opening a branch in Singapore, Indian banks will be able to increase their presence there, and also access the rest of East Asia as Singapore is well connected to other East Asian Countries being the financial hub.

o Reliance Life Insurance Company Ltd., a subsidiary of Reliance Capital Ltd. and the shareholders of AMP Sanmar Life Insurance Company, has signed an agreement for the sale of 100 per cent equity in Chennai-based life insurance firm. Reliance Capital’s acquisition is, however, subject to the regulatory approval. AMP Sanmar Life, a 26:74 joint venture between the Australian AMP Group and the Chennai-based Sanmar, has a capital base of Rs.217.5 crore. This acquisition will give Reliance Capital an immediate entry into the growing life insurance business. AMP Sanmar has over 90 offices, a 9000 strong agency force and an employee base of 900.

o Oracle would buy a majority stake in India’s largest applications software company i-flex solutions in a $909 million (around Rs.3,960 crore at an exchange rate of Rs.43.55 to a dollar) deal. The global technology major will acquire Citigroup Venture Capital International’s 41 per cent ownership stake in i-flex solutions for a consideration of $593 million (Rs.2,583 crore). This will be followed by a 20 per cent open-offer for public shareholding, which can cost $316 million (offer price of Rs.882.62 per share), if the offer price is fully subscribed. The open offer is priced at a 6 per cent premium to the 30-days average price and at a 24 per cent premium to the 90-days average price.

o Telecom R&D company, Sasken Communication Technologies, is making an initial public offering of 50 lakh equity shares of Rs.10 each through book building process. The company has fixed a price band in the range of Rs.230 – Rs.250 per share. The company has reserved five lakh shares for allotment to its employees.

• Capital Markets
 Primary Market
o The IPO of HT Media has been oversubscribed, despite the alleged overpricing of the issue.

 Secondary Market
o Persistent FII inflows, bullish global capital markets and a rally in steel majors and few index heavy weights drove the sensex higher for the first four days of the week, but the rally was snapped on the last day of the week due to profit booking. Over the week, the BSE sensex and NSE nifty registered gains of 118.52 points and 48.9 points, respectively.

o Among the sectoral indices of BSE, except BSE Bankex all others have registered gains. Amongst, the highest gains have been recorded by BSE consumer durables. The BSE Mid-cap(4.7 per cent) and BSE small-cap (4.3 per cent) have continued to outpace the BSE sensex.

o During the week under review, the FIIs have been net buyers of equities to the extent of Rs 2,738 crore with purchases of Rs 9,362 crore and sales of Rs 6,624 crore, while they have been net sellers of debt instruments worth Rs 214 crore, with sales of Rs 328 crore and purchases of Rs 114 crore.

o Mutual funds have also been net buyers of equities during the week under review to the extent of Rs 349 crore with purchases of Rs 2089 crore and sales of Rs 1740 crore. They have net buyers of debt instruments of Rs 1,985 crore with purchases of Rs 3,418 crore and sales of Rs 1,433 crore.

• Derivatives
o Following the expiry of July contracts, investors took fresh position in the August contracts leading to a buoyant interest in the market. The daily turnover on the F&O segment of NSE during the week ranged between Rs 12,999 crore and Rs 21,814 crore as against a range of Rs 16900 crore to Rs 25,422 crore in the previous week.

• Government Securities Market
 Primary Market
o RBI auctioned the state development loan of Kerala 2015 for notified amount of Rs 250 crore at a cut-off yield of 7.32 per cent.

o On August 11, the government is to re-issue 7.50 per cent 2034 and 8.07 per cent 2017 for notified amounts of Rs 3,000 crore and Rs 5,000 crore, respectively.

 Secondary Market

o Despite easing of the inflation rate, the yields have firmed up. The weighted YTM of 7.38 per cent 2015 has increased from 6.95 per cent on July 30 to 6.99 per cent on August 5.

o However, the call rates have eased to a range of 3.15 per cent to 5.13 per cent in this week as compared with 5-5.05 per cent during the previous week.

• Bond Market
o During the week under review, there have been two issuers mobilizing Rs 375 crore, of which Rs 350 crore has been mobilised by Exim Bank and Rs 25 crore by Gruh Finance Ltd.

• Foreign Exchange Market
o The rupee-dollar rate has depreciated from Rs 43.45 on August 1 to Rs 43.50 on July 5, while the six-month forward premia has fallen from 1.09 per cent on July 29 to 0.89 per cent on August 5.

• Commodities Futures Derivatives.
o The NCDEXAGRI index has risen during this week from 1245.16 on July 30 to 1249.37 on August 6.
INFLATION
o Inflation rate, based on wholesale price index has declined marginally to 4.07 per cent during the week ended July 23, 2005 from 4.18 per cent registered during the previous week. The annual point-to-point inflation rate was at 7.91 per cent in the corresponding week last year.
o The WPI has moved up a tad to 194.5 during the week under review from the last weeks’ level of 194.4 (Base: 1993-94=100). The index of primary articles’ group has risen by 0.2 per cent to 192.5 from the previous week’s level of 192.1, mainly due to increase in the price indices of non-food articles to 182 from 181.4 in the previous week. The index of fuel, power, light and lubricants group has remained unchanged at the previous week’s level of 304.2. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has also remained unaltered to stand at previous week’s level of 170.7. The price indices of food products group in this category showed an increase, but this effect was nullified by the decline in the price indices of textiles.
o The latest final index of WPI for the week ended May 28, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 192.3 and 5.25 per cent instead of the provisional levels of 192.2 and 5.20 per cent, respectively.
o The weekly average of the inflation rate for July is worked out to be 4.1 per cent as compared to 4.2 per cent in June this year. The contained rate of inflation during last four weeks is attributed mainly to the high base effect.

o According to the Ministry of Rural Development, over 65 per cent beneficiaries of the Sampoorna Grameen Rozgar Yojana (SGRY) receive wages that are below the minimum wages set by the states. The Employment Assurance Scheme and Jawahar Gram Samridhi Yojana implemented upto 2001-2002, have been merged and new scheme known as Sampoorna Grameen Rozgar Yojana (SGRY) was launched with effect from April 2002. The objective of the scheme is to provide wage employment and food security in rural areas. The report by the Ministry of Rural Development reported that a majority of the beneficiaries received the daily wages ranging from Rs. 31 to Rs 60 a day, as against Rs. 84 per manday for skilled workers and Rs. 60.23 per manday for as per the norm set by the states. The average daily wage received by beneficiaries in all states was Rs. 58.48. The study has also pointed out the leakage in the supply chain. The report says that there is a considerable discrepancy in the foodgrains statistics provided by the Food Corporation of India, zillah parishads and the state civil supplies department in specific districts. Similarly only 20 states were able to provide workers with 5 kg of foodgrain per manday as it was declared in the scheme. These signs of leakages should be closely watched and monitored in order to avoid inefficiencies in the supply chain. The scheme is to be merged with National Rural Employment Guarantee Scheme.
o The Congress President has suggested some amendments to make the National Rural Employment Guarantee Scheme (NREGS) more effective. The scheme aims to provide employment to one person of every rural household for at least 100 day a year. The amendments as follows:

1. To guarantee employment to any one who offered to work for the prescribed wage, instead of confining the same to below poverty line (BPL) job-seekers.

2. The guarantee once applicable must not be open to withdrawal at the government’s discretion.

3. The entire financial burden could be borne by the Centre, with the states meeting the expenditure on unemployment allowance. Panchayats should play a central role in selection of works as well as in implementation and monitoring of the scheme. Initially as per the scheme, the Centre was suppose to bear the wage cost and 75 per cent of the material cost involved in implementing the NREGS across the country and the states were required to bear the balance of 25 per cent and pay the unemployment allowance to those who register under the programme, but are not given the jobs.

o These amendments will require the government to radically rework on the EGS bill. According to the government officials, this expansion would entail a huge cost. Even with the existing provisions, the total yearly cost of providing a guaranteed job to one person in each family below the poverty line is estimated to be around Rs. 15,000 crore in the first year. The total cost of the scheme in next three to four years is estimated to be at around Rs.40,000 crore. If the scheme is extended to cover all individuals, it would cost the government a huge sum, especially at the time when it is struggling to reduce its fiscal deficit.

o As per the latest data released by Controller General of Accounts (CAG), despite a buoyant tax revenue, the Centre’s fiscal deficit has increased to Rs. 54,517 crore which is 36 per cent of the budget estimates compared with around 30 per cent during April-June 2004. Revenue receipts at Rs. 38,003 crore, accounting for around 11 per cent of the budget estimates, were marginally higher than previous year. Meanwhile, the revenue deficit during the first quarter of the current fiscal year stood at Rs. 47,311 crore, which is 50 per cent of the budget estimate (Rs. 95,312 crore) as compared to 61 per cent in the corresponding period last year. Revenue deficit was largely better due to the marginal increase in revenue receipts along with the check on both plan and non-plan expenditure. Interest payments in the first quarter stood at Rs. 26,428 crore which is 19.7 per cent of the budget estimate (Rs.1, 33,945 crore). Market borrowings accounted for 49 per cent as it stood at Rs. 54,142 crore against the budgeted Rs. 1,10,291 crore.

o The Associated Chambers of Commerce and Industries (Assocham) asked the Finance Ministry to further simplify the process for obtaining central registration for the purpose of service tax. The chamber has pointed out that the board has not yet issued forms which are required under the Rule 3 (1) of the Service Tax (Registration of Special Category of Persons) Rules, 2005.As per the rule the input service distributor is required to make an application for registration. The rules also states that any provider of taxable services, whose aggregate value of taxable services exceeds Rs. 3 lakh in a financial year will have to make an application for registration on a form as may be specified by notification by the board, within 30 days of exceeding such value.

o The fringe benefit tax is likely to fetch the government around Rs. 300 crore in the first quarter of the current fiscal year. This estimated liability on the corporate sector is based on 210 companies that have provided information on FBT in its results for the quarter ended June 2005. These 210 companies have provided Rs. 175 crore for FBT accounting for only 0.1 per cent of the sales for the quarter ending June 2005. The turnover of the corporate sector is estimated to be over Rs. 400,000 crore for the first quarter. This estimation is based on the sales of Rs. 388,138 crore achieved by 2,865 companies during the quarter ending March 2005.

o In a much delayed decision, the government of Goa, in order to bring about parity of rates between VAT implementing sates, has reduced the rate of tax from 12.5 per cent to 4 per cent on 77 items and has exempted 13 item from VAT. As per the notification, the items which have been exempted from VAT includes maps, charts and globes for students, jaggery, salt, papad, suji and besan, khadi items, animal feed like husk of pulses, bran and de-oiled cakes, fish-net, twine and ropes and fish seeds. Some of the prominent items on which the tax has been reduced to 4 per cent are vaccines, syringes, medicated ointment, honey, processed fruits, pickles, fruit squash, fruit drinks, fruit juice, cashew seeds, bio-fertiliser and handicrafts.

o In a bid to maximise collections of excise and customs arrears, the government is reworking on its collection strategy by focusing on “realisable arrears which are free from litigation.” About 90 per cent of the total indirect tax arrears are locked in either appellate tribunals or in various civil courts, thereby causing a major dent on revenue collections. In 2004-05, the collection of customs and central excise arrears increased by 272 per cent to Rs. 2,642 crore from Rs. 711 crore in the previous year. As per the proposed amendments, the assessee would be given only three hearings after the issuance of show-cause notice. Further, any default case would be deemed to have concluded, even if an assessee paid the duty calculated by the excise/custom commissioner along with 25 per cent penalty immediately after the issuance of the show-cause notice. Significantly, customs and excise commissioners would be empowered to pre-emptively attach the assessee’s property with the issuance of show-cause. Meanwhile, the customs arrears stood at Rs. 3,325 crore as on June 30, while excise arrears were at Rs. 12,495 crore at the beginning of the current fiscal .

o According to a study by the World Bank, remittances from the migrants to their home countries, including India, are now the largest source of external finance for developing countries after foreign direct investment.

o India’s exports are likely to be affected by the torrential rainfall witnessed by Mumbai. According to commerce ministry estimates, the 20 per cent export growth that India has been registering in the last three years is slated to come down by at least 3 per cent. The movement of containers has been stalled due to a deluge in Mumbai, which is likely to affect exports.

o Export activities from Gujarat have been hit hard due to heavy rains in Mumbai. In Gujarat, over 500 containers are lying, as traffic on road and rail is not moving smoothly. Containers are not reaching Jawaharlal Nehru Port Trust in Mumbai.

o South Korea aims at $10 billion bilateral trade with India by 2008.
o Pakistan has announced removal of four-year ban on sugar imports from India in view to meet rising sugar demand ahead of holy month of Ramadan. Earlier Pakistan had allowed its private sector to import without any limit, to meet the demand, except from India and Israel.
o FDI into India, during 2004-05, increased by 45.5 per cent at Rs 14652.73 crore.

o The power sector has received around Rs 3559.06 crore of foreign direct investment during January 2002 to May 2005. Mauritius alone accounted for nearly 80 per cent of the investment at Rs 2819.96 crore. It was followed by UK and USA as the second and the third largest investment.

o The government would carefully consider the proposals of the parliamentary committee to allow Foreign Direct Investment in the pension sector, on the lines of insurance sector.

o The finance ministry is not likely to accept the Parliamentary standing committee’s recommendation on capping foreign investment for pension fund managers at 26 per cent.

o The Goa government is seriously contemplating the idea of establishing a Special economic zone (SEZ) in the state. The sole intention of establishing SEZ is to generate employment.

o With a slew of new companies setting up base, exports from the MEPZ special economic zone (SEZ) is expected to get a boost during the current fiscal year. The zone, which is considered to be the third largest in the country in terms of exports, is looking at a considerable growth in its performance over a target of Rs 1650 crore, set by the ministry of commerce and industry.

o Crisil has assigned P2+ rating to Shela Foam Private Limited’s (SFPL) Rs. 100 million commercial paper programme. The assigned rating reflects the company’s long standing and leading presence in the polyurethane foam market as well as the market acceptance enjoyed by its Sleepwell and Feather Foam brands.

o In an another exercise, the agency has reaffirmed the FAAA/Stable rating assigned to Balaji Auto Limited (BAL). The rating continues to reflect BAL’s extremely strong financial risk profile, which has enabled it to meet the competitive challenges in the domestic two-wheeler market by leveraging its pricing flexibility and investing in new products. Crisil has also reaffirmed the A+/Stable and P1+ ratings assigned to the Ford Credit Kotak Mahindra Limited’s (FCKML) non-convertible debenture programme aggregating to Rs.35 crore and Rs. 1.9 billion short-term debt programme, respectively. The ratings continues to reflects FCKML’s healthy asset quality, good resource positions as well as its strong financial profile which is characterised by adequate capital levels and conservative asset-liability management.

o Meanwhile, the agency has also reaffirmed the D rating assigned to DCM Shriram Industries Limited’s Rs. 115.2 million non-convertible debenture programme. The ratings indicate that the instruments are in default and in arrears of interest or principal payments. Despite improvement in the company's profitability, the instruments continue to be in default pending approval for a restructuring proposal put forward by the company.

The process of offering shares in the primary market has been subjected to several criticisms and some pertinent questions have been raised regarding various aspects of the book building process, which has been designed essentially as an instrument of better price discovery; associated with of course is the objective of fairness in allotment of shares. The domestic institutional investors have alleged that in the book-building process, investment bankers were using too much discretion in order to favour a few clients. Further, the very reason for using book-building process for price discovery has been fraught with problems, as some of the bidders may bid for any amount but are not required to pay even margin money. Despite the concerns expressed at inadequate retail participation in the primary market, the reservation of the issue for small investors automatically restricts their presence in the market.

Following these critical comments, SEBI has begun looking into the working of the book-building process , particularly the basis of allotment some of the big IPOs launched in the past. It has been understood that SEBI teams have started visiting and acquiring data from leading investment bankers to delve into the procedures followed for allotments, especially for the qualified institutional investors (QIB) segment.

Book-Building Process
“Book Building” means a process undertaken by which the demand for a security proposed to be issued by a corporate body is elicited and built up and the price for the security is assessed on the basis of the bids obtained for the issue. This method provides an opportunity to the market to discover an appropriate price for the security. It is generally the price at the modal quantum of bid.

The book-building process is either through 100 per cent or 75 per cent of the net offer to public. In the case of 100 per cent offer, the allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35: 15: 50, respectively. In case the book built issues are made pursuant to the requirement of mandatory allocation of 60 per cent to QIBs in terms of Rule 19(2)(b) of Securities Contract Regulation Act (SCRA), the respective figures are 30 per cent for RIIs and 10 per cent for NIIs. This is a transitory provision pending harmonization of the QIB allocation in terms of the aforesaid Rule with that specified in the guidelines.

In case of 75 per cent net offer through book-building –(a) not less than 25 per cent of the net offer to the public, should be available for allocation to non QIBs and not more than 50 per cent of the net offer to the public should be available for allocation to QIBs, (b) the balance 25 per cent of the net offer to the public, offered at a price determined through book building, should be available only to retail individual investors who have either not participated or have not received any allocation, in the book built portion, provided that, 50 per cent of the issue size should be mandatorily allotted to the QIBs, in case the issuer company is making a public offer.

Book building is a process of price discovery. Hence, the Red Herring Prospectus does not contain a price. Instead, the Red Herring Prospectus contains either the floor price of the securities offered through it or a price band along with the range within which the bids can move. The spread between the floor and the cap of the price band shall not be more than 20 per cent. In other words, it means that the cap should not be more than 120 per cent of the floor price. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing press releases and also by indicating the change on the relevant website and the terminals of the syndicate members.

The applicants bid for the shares quoting the price and the quantity that they would like to bid at. Only the retail investors have the option of bidding at ‘cut-off’. After the bidding process is complete, the ‘cut-off’ price is arrived at on the lines of Dutch auction. Dutch auction is a system of auction in which minimum price and such other conditions are prescribed. The basis of allotment is then finalised and letters of allotment/refund is undertaken. The final prospectus with all the details including the final issue price and the issue size is filed with the Registrar of Companies (ROC), thus completing the issue process.

The allotment to the Qualified Institutional Buyers (QIBs) is on a discretionary basis. The discretion is left to the Merchant Bankers who first disclose the parameters of judgment in the Red Herring Prospectus. There are no objective conditions stipulated as per the Disclosure and Investor Protection (DIP) Guidelines. The Merchant Bankers are free to set their criteria and mention the same in the Red Herring Prospectus.

After the closure of the issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), Retail Institutional Investors (RIIs) and employees. The over subscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document. Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for. The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined. This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the lead manager for the issue.

Qualified Institutional Buyer (QIBs)

Qualified Institutional Buyers (QIBs) are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital market. In terms of clause 2.2.2B (v) of DIP Guidelines, a ‘Qualified Institutional
Buyer’ shall mean:

a. Public financial institution as defined in section 4A of the Companies Act, 1956;
b. Scheduled commercial banks;
c. Mutual funds;
d. Foreign institutional investor registered with SEBI;
e. Multilateral and bilateral development financial institutions;
f. Venture capital funds registered with SEBI.
g. Foreign Venture capital investors registered with SEBI.
h. State Industrial Development Corporations.
i. Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).
j. Provident Funds with minimum corpus of Rs.25 crores
k. Pension Funds with minimum corpus of Rs. 25 crores)

As stated above, the DIP guidelines have imposed no restrictions and instead complete freedom is given to the merchant bankers to allot the shares within the QIBs. This provides ample scope for manipulation of allotment in favour of some categories and as against the other. In absence of any margin money or without any commitment imposed on bids tendered by QIBs, they can bid for any quantity. This tends to create a situation of high artificial demand. It also possible that those QIBs who might not have any serious intention to acquire shares, may bid for larger quantity and help the company and lead manager to attract the other investors.

Further, the permission to amend and withdraw the bids tendered also offers a large scope for creating synthetic hype in the market. Absence of pre-defined standard parameters of allotment to QIBs further fuels this alleged situation.

The argument, that discretion in allotment to QIBs is allowed, to bring in quality investors, is no more valid as brokerage income to associate arms of lead managers seems to be of prime importance. Also, there are no standards for defining the quality of the investors.

The lead managers have been arguing against the withdrawal of discretionary powers in allotting the shares that within the QIBs category itself, the investors differ significantly from each other in terms of investment philosophies, commitment to markets and sectors. If proportionate allotment were used instead of discretionary allotment, then all types of QIBs would get the same allocation. This could lad to a situation where leveraged funds get higher allocation than long-term investors, which could be detrimental for the past issue market performance.

They are also supporting the present system wherein the QIBs are not required to pay the margin money. The reason for paying the margin money arises from the perceived risk of non-payment. Given that QIBs are regulated entities they have lower risk of financing default, hence, there is no need for margin money to be imposed. This logic has worked well in the secondary market wherein QIB trades are exempt from margin requirements. Further, it is argued that margin requirements for them would result in inefficient utilisation of money as funds are blocked for 15 days.

Interestingly, despite the said information savvy system, the regulator and the stock exchanges have not provided the market participants with historic data about the bids received and category-wise oversubscription. In order to improve the understanding of the securities market, it would be in the interest of investors to have basic data on primary issues on a historical basis and it would also benefit the research community.

In order to study the pattern of allocation of shares within the QIBs, we have selected a few public equity offerings from the recent past. The data on QIBs include five major categories: FIs and Banks, Mutual Funds (MFs), FIIs, insurance companies and Venture capitalists.

In all the issues under review, the FIIs have been allotted the major chunk of the issue ranging between 50 to 77 per cent, while financial institutions (Fis) and banks have been allotted in the range of 2 to 30 per cent. Insurance companies are allotted meagre amounts. Venture capitalists have yet to play a role in the equity market (Table 1).

Also, there have been sharp differences in oversubscriptions among different categories; such instances can be avoided if margin money is imposed on all types of bidders. For instance, the initial public offering (IPO) of Tata Consultancy Services (TCS), which closed on August 5, 2004, received a record 10.5 lakh applications, the highest ever number of applications received in a 100 per cent book-built issue. The issue was oversubscribed by 6.69 times and it received a total application amount of over Rs.34,000 crore ( Table 2) as against the issue size of Rs.4,991 crore. The portion for QIBs buyers was oversubscribed 8.5 times. The portion of retail investors was oversubscribed by only about 2 times and non-institutional bidders portion about 10 times. Little wonder, the three Rs 5,000 crore plus offerings last year—ONGC, NTPC and TCS—attracted only 0.57 million, 1.4 million and 1.2 million investors, respectively. Way back in 1992, when the book-building system was not in operation, the Rs 217 crore issue of Mangalore Refineries had drawn 4.4 million applications.

Table 2: Company-wise Bid Subscription
TCS
Category	No. of Applicants	No. of Shares Bid	Subscription Bid (No. of Times)	Actual Allotment	Allotment as percentage of shares Bid
QIBs	466	249,029,648	7.00	34,436,059	13.8
NIBs	63,374	179,272,925	19.21	1,343,955	0.7
RIIs	1,187,153	43,964,820	2.91	15,071,806	34.3
Employees	18,598	4,932,364	0.77	N.A.
NTPC
QIBs	546	8,02,25,93,100	18.98	42,26,07,500	5.3
NIBs	29,906	2,52,34,14,665	11.94	6,07,91,424	2.4
RIIs	14,22,095	80,35,15,148	3.8	213303812	26.5
Employees	16,022	4,47,48,350	2.17	N.A.
Bharati Shipyard Limited
QIBs	106	121,188,200	21.54	50,355,100	41.6
NIBs	4,610	576,771,500	205.07	N.A.
RIIs	400,612	203,772,900	5555.63	3,662,800	1.8
Employees	128	399,400	0.32	N.A.
Punjab National Bank
QIBs	455	860,658,870	26.90	N.A.
NIBs	10073	260,734,435	27.16	3310138	1.3
RIIs	777790	79,970,560	3.57	79,970,560	28.0
Employees	36601	12,903,240	1.61	N.A.
Existing Shareholders	25158	12,207,825	1.53	N.A.
Notes: QIBs – Qualified Institutional Buyers NIBs – Non-Institutional Bidders RIIs – Retail Investment Individuals N.A. – Not available

Currently, the bids of all three categories of investors - QIBs, NIIs and RIIs - are part of a single book-building process. While NIIs and RIIs are required to pay the full amount at the time of bidding, QIBs are exempt from this. This allows them to put in large bids which often come as a follow-up to a commitment made to the issuer or the lead mangers before the opening of the issue. The heavy oversubscription figure gives an impression of massive appetite for the stock, which eventually lures retail investors in droves towards the issue. Most retail bids are then made at the "cut-off" price in fear of missing out on allotment if the eventual price fixed is higher than the bid. This is believed to distort the price discovery mechanism with virtually all issues now being eventually priced at the highest end of the price band.

At a recent board meeting, the members SEBI has empowered Chairman M Damodaran to scrap the discretionary allotment to Qualified Institutional Buyers (QIBs) made by investment bankers, but it gave him the choice to time its implementation. SEBI too is keen on ending discretion, but it is mulling over the possible consequences. For instance, some say that an end to discretionary allotment won’t end the practice of making large and frivolous bids to mislead investors and that such a move must be necessarily accompanied by an imposition of margin on their applications. Ideally, margins are the best antidote to frivolous bidding. And the Security Market Infrastructure Leveraging Expert (SMILE) Task Force and the Primary Market Advisory Committee (PMAC) had both recommended the imposition of margins on institutional applications to public issues. The recommendations were ignored because the outraged institutions pointed to the ‘international practice’ of discretionary allotment by Lead Managers. However, this ignores the fact that internationally, retail and institutional investors are never part of a single book-built process.

The role of retail investors in price discovery process has been peripheral as is evident from the past issues which shows that 97 per cent of the retail participation has been at the cut-off price.

Thus, neither the retail investors are participating in the price discovery process nor are the institutional investors as they are not paying margin money and hence their bids may not be tendered with the purpose of price discovery.

Changes contemplated

The government is working on a proposal to increase the percentage of allocation to retail investors from 35 per cent to 40 per cent in public issue. The proposal is part of the measures being worked upon by the government to increase the presence of retail investors in the market.

The Ministry of Finance and the SEBI are considering a proposal to have separate books for qualified institutional buyers (QIBs), on one hand and NIIs and retail individual investors (RIIs), on the other. They are also considering replacement of the discretionary quota system for allotment to QIBs with proportionate allotment and seeking payment of margin by institutional buyers.

Given the primary role of the capital market to mobilise funds through the primary equity market, it is necessary that the market is fair and transparent. If the market is not perceived as fair; it then this will drive the retail investors away from the market which will adversely affect the longterm development of the market. As it is, the mutual funds on India have not inspired confidence in retail investors.

Following the abolition of the CCI in the early 1990s, wherein a strict control was exercised on the entry and pricing of issues, the SEBI has delegated the pricing and allotting powers to the lead managers. However, they are the market makers of the issue and not the subscribers to the issue. Hence, SEBI should endeavour to make the present book-building process an actual price discovery process and not a proxy system. It is imperative that the margin money is imposed across categories, as this will curb the building up of artificial demand. Also, the retail investors should be encouraged to put in bids at prices they choose and not at cut-off prices.

Further, it is necessary that the data on various aspects of the primary and secondary market are made available to the investor, which will help them take informed decisions.

* This note has been prepared by Bipin Deokar and Piyusha Hukeri

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.