CHAPTER -VIII FINDINGS AND SUGGESTIONS

CHAPTER -VIII FINDINGS AND SUGGESTIONS Introduction Primary capital market provides opportunity to corporate entities to raise the required funds from different categories of investors through issue of both debt and equity securities. Merchant bankers play the role of apex financial intermediary in the primary capital market in India acting as issue manager. They help the issuing companies in the total management of issue of securities. Merchant bankers, as lead managers plan, co-ordinate and control the entire issue activities and direct different agencies to contribute to the successful marketing of securities. 8.1 Merchant Banking in India The formal merchant banking services in Indian capital market were initiated in 1967, when Reserve Bank of India granted licence to The National Grindlays Bank to perform the services relating to issue management. The First National City Bank followed Grindlays Bank by opening a Management Consultant Division in 1970. Both these banks acted as managers to the issues. From 1969 to 1992, merchant banks performed the issue management activities under the legislative framework of Capital Issues (Control) Act, 1947. The procedure of the managing capital issue by a merchant banker is divided into pre-and post issue management activities. Presently, public issue management activities of merchant bankers are regulated and monitored by SEBI through the guidelines, clarifications, circulars containing instructions to merchant bankers, stock exchanges and other constituents of the capital market. Under the Capital Issues (Control) Act, 1947, companies were required to obtain prior approval from the Controller of Capital Issues (CCI) for raising capital. CCI s permission was required with regard to the timing, size of the issue and the determination of price at which the securities were to be issued. CCI norms for pricing often led to extreme under pricing and heavy oversubscription. The extent of under pricing of public issues deterred the firms from going public. So, debt played a major role in financing the projects. With the passing of SEBI Act, 1992, and the repeal of Capital Issues (Control) Act, 1947, the government s control over the determination of issue size, time and 220

price of securities ceased and the market was allowed to allocate resources on competitive basis. Under the SEBI (Merchant Bankers) Regulations, 1992, Merchant Bankers were recognized as primary intermediaries in the role of issue manager in the capital market. The regulations provided for the compulsory registration, capital adequacy requirements, general obligations and responsibilities and code of conduct for the merchant bankers as also the procedure for inspection of books of accounts, records and documents of merchant bankers. The initial set of guidelines issued by SEBI allowed almost all firms to freely price their issues and decide on the size of the issue in consultation with lead merchant bankers. The easing norms for raising capital provided free access to the companies to raise funds from the public. The period 1992-93 to 1996-97 saw a rush of public limited companies approaching primary market for equity issues. During this period, a total of 4,822 public issues (an annual average of 964 issues) with an aggregate amount of Rs. 56,286 crore were floated by companies. Easy market entry norms were widely misused by the companies during this period. Issue price determined by issuers, in consultations with lead merchant bankers was not justified and the investors lost heavily. A number of companies were vanished and the market operators disappeared from the market. CRB scam in the capital market in 1997 led to the amendments in the SEBI (Merchant Bankers) Regulations, 1992. Under the amendments, only body corporates have been allowed to function as merchant bankers and multiple categories of merchant bankers have been abolished. Merchant bankers are allowed to undertake only those activities which are related to securities market including issue management activities. They are prohibited from carrying on fund based activities other than those related exclusively to the capital market. Secondary market losses to investors during 1993-95, lack of investors confidence and entry barriers guidelines by SEBI resulted in the decline in the primary market activities in 1997-98 and thereafter. 8.2 Primary Capital Market in India during the Period under Review During the period of twelve years from 1997-98 to 2008-09, a total of 685 public issues with an aggregate amount of Rs. 1,90,515.18 crore were floated. This comprised of 618 equity issues with an aggregate amount of Rs. 1,51,390.32 crore. During the period from 1997-98 to 2000-01, the issues from Information Technology, 221

Communication and Entertainment sector flooded the market. A depressed secondary market closed the doors for the primary market during 2001-02 and 2002-03. As the secondary market moved into gears in 2003-04, primary market too started its revival and further got a boost in 2005-06 and thereafter. The primary debt market during the period under review was dominated by bonds issues by ICICI Ltd. and IDBI Ltd. During the period of study, a number of IPOs of equity issues dominated the market as compared to FPOs. Out of total 618 companies which approached the primary market for equity issues, 546 (88%) companies were unlisted companies raising an amount of Rs. 1,04,174.87 crore (68.8% of total amount). Only 72 (12%) FPOs were made with an aggregate amount of Rs. 47,215.45 crore (31.2) during the period of twelve years. Taking advantage of free pricing norms for public issues, a large number of companies floated equity issues to the public at premium. A total of 450 (72.8%) companies with an aggregate amount of Rs. 1,49,824.64 crore (98.97%) made public issues at premium while 168 companies (27.2%) could issue equity shares at par involving a total amount of Rs. 1565.68 crore (1.03%) only. India s gross domestic saving rate as percentage of GDP, remained stagnant at nearly 24% from 1997-98 to 2001-02. After 2002-03, it showed an increasing trend and went up to 36.4% in 2007-08. But it declined to 32.5% in 2008-09. A major portion of gross domestic savings has been from household savings. Savings of the economy are invested in physical and financial assets. A large percentage of household savings has been invested in financial assets. However, a very small percentage of financial assets comprised investment in shares and debenture. In 1999-2000, only 7.7% of financial assets formed investment in shares and debentures which further declined to 1.1% in 2003-04 and 2004-05 but went up to 4.9% in 2005-06, 6.3% in 2006-07 and 12.4% in 2007-08. It again declined to 2.6% in 2008-09. The Indian equity market may be one of the best performers in terms of returns. However, the equity cult is yet to spread in the country as the number of investors is just one percent of the total population of the country. A survey conducted by SEBI-NCAER in 2003 has revealed that only about 13.1 million household investors directly invested in equity shares or debentures or both in 2000-01. There are roughly 177 million households in India of which only 13.1 million (7.4%) directly invested in equities and bonds. 222

Further, demat account by investors has been made compulsory for participation in capital market. Thus, the investors base in the capital market can be judged from the number of demat accounts in the country. Number of demat accounts with two depositories stood at 99.0 lakhs on December 31, 2006 which increased to 1.433 crores on December 31,2008 and further to 1.45 crore on March 31, 2009. 8.3 Findings of the Study 8.3.1 Performance Evaluation of Merchant bankers For the purpose of evaluation of merchant bankers as lead managers, they have been categorized into Indian and foreign merchant bankers. The major findings in this regard are: i. The Indian merchant bankers dominated the activities of management of public issue of equity shares both with respect to number and amount raised. Out of 618 equity issues floated during the period under review, as many as 544 (88%) were handled by Indian merchant bankers, while foreign merchant bankers were the lead managers to 59 (12%) equity issues. With respect to amount raised through equity issues, Rs. 78,840.63 crore (52%) was managed by Indian merchant bankers and the amount raised through foreign merchant bankers stood at Rs. 72,549.70 crore (48%). ii. Companies making large size issues of equity shares relied more on foreign merchant bankers than on Indian merchant bankers because of their vast international network. iii. Year wise participation of merchant bankers in the management of public issues of equity showed that the majority of small merchant bankers were involved in one or two issues only during the year. iv. On the basis of amount of equity shares managed by Indian merchant bankers, it has been found that Kotak Mahindra Capital Co. Ltd was ahead of other Indian merchant bankers by managing Rs. 23,631.22 crore (15.61%) followed by Enam Securities Ltd managing Rs. 16,886 crore (11.15%), ICICI Securities Rs. 13,938.44 crore (9.21%) and SBI Capital Markets Rs. 6,868.31 crore (4.53%). On the basis of number of public issues of equity managed, SBI Capital Markets Ltd. was the preferred choice of maximum issuers (43 in numbers). This was followed by Enam Securities Ltd with 35 equity issues. 223

Karvy Investor Services Ltd. managed 34 equity issues. ICICI Securities Ltd, UTI Securities Ltd and Kotak Mahindra Capital Co. Ltd managed 32, 33 and 30 public issues respectively. v. On the basis of average issue size of equity managed by Indian merchant bankers, again Kotak Mahindra Capital Co. Ltd, managed the larger sized issues with an average size of Rs. 787.71 crore followed by Enam Securities Ltd with an average size of Rs. 562.87 crore and ICICI Securities Ltd with Rs. 435.58 crore. vi. SBI Capital Markets Ltd was the preferred choice of public and private banks for the management of their public issues of equity. Out of 40 public issues of equity floated by public sector banks in India during the period under review, SBI Capital Markets Ltd was the lead manager/brlm/co-lead manager in as many as 31 equity issues. vii. Two foreign based merchant bankers operating in India, JM Morgan and DSP Merril Lynch played a dominant role in the issue management activities of equity shares. JM Morgan managed 29 equity issues with an aggregate amount of Rs. 24,115.92 crore (15.92%) while DSP Merrill Lynch was involved in the management of 24 equity issues amounting to Rs. 22,416.23 crore (14.81%). Other foreign merchant bankers who showed their presence in issue management activities included HSBC Securities and Capital Market (India) Ltd, ABN Amro, Citigroup Global Markets Ltd, Deutsche Equities India and UBS Securities. viii. During the period under review, small sized issuer companies appointed a single merchant banker as lead manager while large sized equity issues were managed by multiple merchant bankers in the role of lead managers/ BRLMs, co-lead managers, co managers and as advisors to the issues. Out of 618 public issues of equity, 268 issues (43.36%) involving an aggregate amount of Rs. 10,221.99 crore (6.75%) were managed by single lead manager and a total of 350 issuers (56.64%) involving an aggregate amount of Rs. 1,41,168.44 crore (93.25%) appointed more than one merchant bankers for managing their issues. ix. Appointment of merchant bankers as advisors to issues was not the common practice in the public issues of equity shares. In most of the cases, the issuer 224

companies appointed their own subsidiary company/sister concern to advise on their equity issue. x. A large number of merchant bankers were appointed to participate in the management of public issues of debt during the period of study. It was due to the need of wider network because of comparatively large size of debt issues. Co-lead managers, co-managers and advisors to the debt issues were also appointed to facilitate tie up with the banks, financial institutions and potential investors. xi. SBI Capital Markets managed an aggregate of Rs. 17,723.55 crore (45.30% of the total funds) mobilized through 23 bond issues by IDBI Ltd during the period under review. JM Morgan managed 33 bond issues of ICICI Ltd for Rs. 14,554.45 crore (37.2%) while 9 bond issues of ICICI Ltd. for an aggregate amount of Rs. 5,322.17 crore (13.60%) were managed by DSP Merrill Lynch. xii. A dismal participation of public sector banks in the management of debt and equity issues has been noticed during the period under review. With the exception of SBI Capital Markets Ltd and Canara Bank, no other public sector bank performed a significant role in the public issue management activities. SBI Capital Markets Ltd was active as lead manager/brlm, co-lead manager, co-manager and as advisor to the public issues throughout the period under review. Other public sector banks subsidiaries/merchant banking divisions who showed their presence in public issue management were BOB Capital Markets Ltd, Allbank Finance Ltd, BOI Finance Ltd, PNB Capital Markets Ltd. etc. xiii. During the period under study, the rights issue market presented comparatively a dismal picture. There were 330 rights issues during the period of twelve years and the funds mobilized through rights issues were Rs. 63,624 crore. This included an amount of Rs. 32,518 crore raised through rights shares in 2007-08 itself. In comparison to this, funds raised through rights issues during the period of five years (1992-93 to 1996-97) immediately preceding the study period were as high as Rs. 37,973 crore through 1,645 rights issues. xiv. Foreign merchant bankers dominated the management activities of rights issues during the study period. They managed a total of Rs. 36,248.95 crore 225

(56.97%) through 57 issues. This share was Rs. 27,375.44 crore (43.03%) in case of Indian merchant bankers from 273 rights issues. xv. Among the Indian merchant bankers, SBI Capital Markets Ltd was on the top rank with the management of Rs. 5,780.79 crore (9.08%) through 25 rights issues. This was followed by ICICI Securities with Rs. 5,296.03 crore (8.32%) from 28 issues and Kotak Mahindra Capital Co. Ltd with Rs. 4,444.14 crore (6.98%) from 11 issues. Other merchant bankers in this line of business included Keynote Corporate Services, Ambit Corporate Finance, IL&FS Investsmart, Karvy Investor Services Ltd. etc. Keynote Corporate Services specialized in the management of small sized rights issues. It managed 31 rights issues with an aggregate of Rs. 650.22 crore during the period under review. Out of 57 rights issues with an aggregate amount of Rs. 36,248.95 crore managed by foreign banks, JM Morgan secured the confidence of 19 issuer companies involving an aggregate amount of Rs. 10,112.15 crore (15.89%). DSP Merrill Lynch was the lead manager for 12 rights issues of total amount of Rs. 10,129.42 crore (15.92%). HSBC Securities and Capital Market (India) Ltd, and Citibank were the other foreign based merchant bankers engaged in the management of rights issues. xvi. Twelve largest rights issues contributed a total amount of Rs. 46,027.44 crore (40.61%) in the pool of resources mobilized through rights issues. These were managed by top ranking merchant bankers which included ICICI Securities Ltd, SBI Capital Markets Ltd, DSP Merrill Lynch and JM Morgan Stanley. ICICI Securities and SBI Capital Markets were the lead managers for two largest rights issues each. DSP Merrill Lynch handled one largest issue independently and two issues jointly with JM Morgan Stanley and Enam Financial Services Ltd. The major rights issues of State Bank of India in 2007-08 and Hindalco Industries Ltd in 2008-09 respectively were mainly managed by foreign merchant bankers. 8.3.2 Underwriting of Public Issues by Merchant Bankers Underwriting of public issues by merchant bankers has assumed a great significance and urgency in primary market in India. Even after October 1994, when 226

underwriting of public issues was made optional by SEBI, its role has not diminished in the Indian capital market. SEBI (Underwriters) Rules, 1993 as amended from time to time provide for the compulsory registration of underwriters, capital adequacy requirements, general obligations and responsibilities with a specified code of conduct, inspection and disciplinary proceedings by the SEBI and the procedure for action against underwriters in case of default. Similarly SEBI (Disclosure & Investor Protection) Guidelines, 2000 as amended from time to time have also prescribed a number of guidelines for the underwriters to the capital issues. The major findings with regard to underwriting of public issues are as follows: i. Primary capital market in India remained stagnant from 1997-98 to 2002-03 and so were the underwriting activities. During this period, public issue market was dominated by debt issues of bonds and debentures mainly by two financial Institutions viz, ICICI Ltd and IDBI Ltd. These issuers did not appoint any underwriter for their issues. Even for public issue of equity shares, most of the issuers did not prefer to underwrite their public issues. So, underwriting activities were limited during this period. Primary market as well as underwriting activities got a boost from 2003-04 onward. ii. A total of 618 issuer companies approached public for equity issues for a total amount of Rs. 1,51,390.32 crore. However, 325 (52.59%) issues involving an amount of Rs. 1,41,937.65 crore (93.76%) were underwritten during the period under review. Higher average issue size of underwritten equity issues showed that while large size issues were underwritten, the underwriters did not show much interest to equity issues of small size. iii. A close competition between Indian and Foreign merchant bankers was found in the underwriting of public issues of equity. Foreign based merchant bankers were able to underwrite 48.77% of the total amount of Rs 1,34,689.15 crore raised through equity issues. The amount underwritten by Indian merchant bankers stood at Rs. 65,455.85 crore (46.12%). iv. Among the Indian merchant bankers, Kotak Mahindra Capital Co. Ltd underwrote the highest amount of Rs. 20,544.73 crore (14.47%). It was followed by Enam Securities Ltd and ICICI Securities Ltd by underwriting Rs. 13,346.35 crore (9.40%) and Rs. 13,317.98 crore (9.38%). Other prominent lead merchant bankers who actively participated in equity issue 227

underwriting included SBI Capital Markets with Rs. 5,111.24 (3.60%) crore and IL&FS Investsmart with Rs. 1456.38 crore (1.02%). Other lead merchant bankers in this line of business included Karvy Investor Services, Anand Rathi Securities, Edelweiss, IDBI Ltd and IDBI Capital Markets Ltd. etc. v. JM Morgan Stanley and DSP Merrill Lynch were the leaders in the management of rights issues during the period under review. JM Morgan secured the underwriting business of Rs. 22,205.40 crore (15.64%) through rights issues while DSP Merrill Lynch was engaged to underwrite Rs. 22,247.94 crore (15.67%). Citigroup Global Markets and UBS Securities India Ltd underwrote Rs. 5,699.65 crore (4.01%) and 3,554.11 (2.5%) respectively while the amount underwritten by HSBC Securities & Finance stood at Rs. 2,375.56 crore (1.67%) only. Overall performance of foreign based merchant bankers in underwriting activities in the primary market in India has been significant in the latter half of the period under review. vi. Stock exchange brokers who participated in underwriting activities on adhoc basis managed to underwrite just 5.06% of total amount underwritten during the period under review. They were more active in public issues underwriting during the latter part of the period under review. vii. The underwritten public issues of equity got favourable response from the public and were generally oversubscribed. However, five underwritten equity issues were undersubscribed by the public and devolved on underwriters. These included Hughes Telecom (Rs.749.21 crore), IT&T Ltd. ( Rs.31.67 crore), South Asia Petrochem Ltd. (Rs. 180 crore), Cairn Ltd. ( Rs.5722 crore) and Vijayeswari Textiles Ltd. ( Rs. 90 crore). viii. It has been found that Syndicate underwriting has been in practice in Indian capital market. Only a few small issues were underwritten by single underwriters. Further, the lead managers to the issues also participated actively as underwriters in that particular public issue. 8.3.3 Pricing of Public Issues Pricing of public issues is the most contentious issue in the management of public issues. In case of follow-on public offerings, the pricing of securities is known to some extent from the prices quoted on the floor of the stock exchange. However, in case of Initial Public Offerings (IPOs), the determination of offer price is more 228

complicated. The role of the lead merchant banker, acting as issue manager becomes more important with respect to pricing of IPOs. i. Capital Issues (Control) Act, 1947 was repealed in May 1992. Consequently, Government s control over issue of capital, pricing of the securities, fixing the premium and rate of interest on debentures etc. ceased to exist and this started the free pricing era in the Indian primary market. SEBI guidelines have provided that the issuer company, in consultation with lead merchant banker, shall decide the price of the securities to be issued to public. There is no price formula stipulated by SEBI and it does not play any role in price fixation. ii. Fixed price and book building process are the two methods followed by the issuer companies for the determination of issue price of equity shares in India. Under book building process, three types of options, that is, 75% book building, 90% book building and 100% book building have been provided by SEBI. In case of 100% book building, allocation of shares to retail individual investors, non institutional investors and qualified institutional buyers have been provided in specified proportion. iii. Book building method was introduced by Hughes Software Systems Ltd. for their IPO of equity in 1999-2000 and later on it became the choice of majority of issuer companies for their large sized issues. During the period of study, 326 public issues of equity (52.6%) out of total 618 were through fixed price method and equity issues through book building process stood at 292 (47.4%). However, it was found that 94.56% of total amount of Rs. 1,49,891 cores raised through equity issues was through book building method and only 5.44% of the amount was raised through fixed price method. The analysis of average size of issue further showed that small companies preferred fixed price method and the issuers companies with large issue size floated their issues through book building method. iv. A total of 441 IPOs of equity shares came to market during the period from 1997-98 to 2006-07. Out of this, 234 IPOs (53.06%) were listed at National Stock Exchange (NSE). NSE was the preferred choice of issuer companies for listing of shares during the latter part of study (2002-03 onward). v. During the period under review, average market return from NSE listed IPOs on first trading day (FTD), after one week, one month, three months, six 229

vi. vii. viii. ix. months and twelve months from FTD was 40.73%, 39.85%, 43.36%, 43.33%, 79.84% and 79.10% respectively. On the first trading day, investors earned higher average IPO return than average market IPOs return in case of the IPOs managed by Enam Securities (44.40%), ICICI Securities (56.59%), IL&FS Investsmart (45.94%), Centrum Capital (102.76%), Micro Securities India (46.26%) and Keynote Corporate Services (149.36%). Similarly after one week from FTD, the lead merchant bankers whose IPOs secured higher average return than average market IPO returns included DSP Merrill Lynch (42.47%), ICICI Securities (68.58%), IL&FS Investsmart (40.63%), Centrum Capital (144.10%), Allianz Securities (43.41%) and Keynote Corporate Services (64.32%). Lead merchant bankers, who were able to secure higher average return than market average return from IPOs managed by them after one month from first trading day (listing day) were DSP Merrill Lynch (46.41%), Enam Financial Services (43.73%), ICICI Securities (65.58%), IL&FS Investsmart (53.03%), Centrum Finance (141.10%) and Keynote Corporate (100.70%). Kotak Mahindra (58.51%), DSP Merrill (64.72%), Enam (65.85%), ICICI Securities (78.15%), Karvy Investor Services (78.60%), IL&FS Investsmart (70.87%), Centrum Finance (108.69%) and Keynote Corporate Services (82.82%) provided higher average return to investors than average market returns of IPOs after three months from first trading day on the IPOs managed by them. After six months from first trading day, average return from IPOs managed by lead merchant bankers including DSP Merrill, ICICI Securities, IL&FS Investsmart and Keynote Corporate Services was found to be higher than average market returns from IPOs. After twelve months from FTD, the average IPO market return was 79.10%. The lead merchant bankers, whose managed IPOs performed better than average market IPO returns included Kotak Mahindra (95.57%), SBI Capital Markets (99.89%), DSP Merrill (97.57%), ICICI Securities (122.99%), IL&FS Investsmart (262.72%), Centrum Capital (123.31%), Micro Securities (131.51%) and Keynote Corporate Services (149.36%). 230

However, Centrum Capital, Micro Securities, Keynote corporate Services were the small lead merchant bankers who managed nearly ten IPOs each during the period under review and were active in the latter part of the period when boom conditions prevailed in the primary capital market in India. x. Overall, the average return of IPOs managed by well known merchant bankers like Kotak Mahindra, SBI Capital Markets Ltd, DSP Merrill, ICICI Securities, IL&FS Investsmart, Centrum Finance and Keynote Corporate Services have been found to be higher than average market return at various points of time. A reasonable average return was provided to investors on the IPOs managed by JM Morgan, Enam Securities and Karvy Investor Services. Average return from IPOs managed by IDBI Ltd, IDBI Capital Markets, Edelweiss Capital and HSBC Securities and Capital (India) Ltd. was found to be below average market IPO returns at various points of time. xi. The average annual market return of NSE listed IPOs showed negative return of 29.97%, 19.26% and 30.53% in the year 1997-98, 1999-2000 and 2000-01 respectively. A high average market return of IPOs was found in the years 2002-03, 2003-04 and 2004-05, the same being as high as 297.69% during 2002-03. The year 2005-06 and 2006-07 provided comparatively reasonable average market return of 50.32% and 58.80% respectively. xii. Analysis of impact of annual average index (NIFTY) return on the annual average return of IPOs managed by different lead merchant bankers showed that average IPOs return was independent of index return in case of all merchant bankers who managed NSE listed IPOs covered by the study. As a matter of fact, Index return failed to influence the average return of all the IPOs managed by various merchant bankers. This type of situation arises due to imperfections in the capital market. xiii. Impact of average annual market return of IPOs on the average annual return of IPOs managed by different merchant bankers has been calculated through simple linear regression. The results showed that market return of IPOs during the study period was influenced by the average return from IPOs managed by top lead merchant bankers like Kotak Mahindra, Enam Securities, JM Morgan, DSP Merril, UTI Securities and IL&FS Investsmart. 231

8.3.4 Marketing of Public Issues Issue management by merchant bankers mainly focuses on three basic functions- origination, underwriting and distribution of securities. Distribution services of lead merchant bankers include the activities and cost incurred in selling and delivering the securities to the investors. The liberalization and globalization of Indian capital market has widened the geographical and demographical range of investors in India. Advancement of technology in communication and data processing has posed a new challenge for the merchant bankers in the area of marketing of public issues. Today, merchant bankers need top care about being at the centre of information flow rather than at the centre of capital flow. The success of public issues depends upon the marketing techniques worked out by the lead managers. It covers the institutional and retail distribution capacity, equity research capabilities, retail distribution network, advertising strategies and international distribution capabilities. i. Disclosure and Investor Protection Guidelines issued by SEBI in 2000 as amended from time to time provide guidelines for advertisement of public issues. The lead merchant banker has been made responsible to ensure compliance with these guidelines for advertisements by the issuing companies. ii. Marketing strategies adopted for public issues aim at educating the investors for active participation in capital market and reducing the cost of issue as well as risk of investors and the issuer companies in the form of overpricing and under pricing respectively. Some of the recent marketing strategies practiced in primary market in India included e-ipo, green shoe option ( over allotment of securities), safety net (buy back of shares) and branding the financial instruments. iii. Primary market in 1997-98, 1998-99 and 2000-01 showed a dismal picture as far as subscription to public issues of equity was concerned. A large number of public issues during this period were subscribed less than three times. A boom in the IPOs from Information Technology and Software companies resulted in favourable response from investors to the primary equity issues in 1999-2000. From 2003-04 onward also, public issues of equity were preferred by investors due to buoyant secondary market conditions. 232

iv. As many as 148 equity issues (23.94%) out of 618 issues floated during the period under review had subscription level from 1.0 to 1.5 times, while 49 (7.92%) equity issues did not get full subscription. 81 equity issues (13.11%) were subscribed in the range of 1.50 to 3.0 times and another 85 issues (13.75%) were subscribed between 25 to 50 times. Not only this, 26 equity issues (4.20%) secured public subscription to the extent of 50 to 75 times, 12 issues (1.94%) in the range of 75 to 100 times and 17 equity issues were subscribed even more than 100 times by the public. Further, the issuer companies got comparatively higher public response for the public issues of equity during the years 1999-2000, 2006-07 and 2007-08 compared to the entire period under review. v. Mean value of oversubscription by all categories of investors was the highest (44.33 times) in 1999-2000. It was followed by mean subscription of 28.56 times in 2007-08. Investors also responded favourably to the equity issues in 2004-05 and 2005-06, when average of the equity subscription was 22.79 and 19.8 times respectively. On the other hand, investors did not respond well to equity issues in 1997-98 and 2001-02, when mean subscription ratio was just 1.47 and 1.42 times respectively. vi. Year wise analysis showed that the response from the retail investors to the public issues of equity was very good in 1999-2000 when they subscribed an average of 30. 12 times to the equity issues. This was followed by 19.89 times in 2004-05 and 16.57 times in 2005-06. Mean subscription from retail investors was just 0.71 and 0.45 times in 1997-98 and 2001-02 respectively. vii. Co-efficient of variation in the subscription ratio of different equity shares floated during a particular year generally showed the high degree of dispersion in the subscription of different equity issues. A high co-efficient of variation (229.30 %) was found in 2000-01 and 223.54 % in 1998-99. On the other hand, the year 2004-05 saw the lowest co-efficient of variation at 91.88%. On the basis of standard deviation, a high deviation of 58.97 was noticed in the subscription level of different equity issues during 1999-2000. However, standard deviation at only 1.42 in 2001-02 showed that the equity issues were evenly subscribed during the year. viii. A high variation in the subscription ratio by retail investors as shown by coefficient of variation was found in 1998-99 and 1997-98 which stood at 233

195.82% and 163.38% respectively. It showed that retail investors have different perceptions for good and average issues. Similarly, co-efficient of variation in the subscription ratio was minimum (107.79%) in 2004-05. ix. Among the top lead merchant bankers, who managed 20 and more public issues of equity during the period under review, equity issues managed by Enam Financial Services got the highest mean subscription ( 33.26 times) from 86 equity issues managed by it. This was followed by Kotak Mahindra with mean subscription ratio of 27.34 times from 81 equity issues. Similarly, mean subscription ratio of equity issues managed by ICICI Securities and Karvy Investor Services was 21.03 and 21.08 times respectively. On the other hand, merchant bankers which got moderate response for the public issues managed by them included Aryaman Financial (1.81 times), IDBI Ltd and IDBI Capital Market (2.29%) and UTI Securities Exchange (11.55 times). x. Participation of retail investors in equity issues managed by different merchant bankers showed that karvy Investor Services, Enam Financial Services, Centrum Finance, Keynote Corporate Services and SBI Capital Markets Ltd found good response from equity issues managed by them. Subscription ratio of issues managed by these lead merchant bankers was 19.34, 14.75, 13.74, 13.10 and 12.57 times respectively. However, the issues managed by Kotak Mahindra Capital Co., DSP Merrill Lynch, IDBI Ltd, IDBI Capital Markets and JM Morgan secured moderate response from retail investors. Aryaman Financial Services could get only 1.5 times mean subscription of retail investors of 24 equity issues managed by it. xi. A high variation in the public response to different equity issues was found in case of issues managed by Keynote Corporate Services (242.42%) and Aryaman Financial Services (166.85%). Least variation was found in the subscription of equity issues managed by Enam Financial Services (99.28%). Similarly, high degree of standard deviation and co-efficient of variation was found for the retail investors subscription of the issues managed by Aryaman Financial Services, DSP Merrill Lynch, SBI Capital Markets and Karvy Investor Services Ltd. xii. Among the category of lead merchant bankers who occasionally participated in the activities of public issue management and managed 5 to 19 equity issues during the period under review, a good public response was found to the 234

xiii. equity issues managed by UBS Securities India Ltd, Citigroup Global Markets, Systematic Global, Edelweiss Capital, SWIFS Capital markets and Fedex Securities. Average subscription ratio for all categories of investors of equity issues managed by these merchant bankers was 68.55, 44.68, 33.32, 26.59, 25.47 and 23.13 times respectively. However, UBS Securities managed by six equity issues in 2007-08 only when boom conditions prevailed in primary market. But the public issues of equity managed by Financial & Management Services, Ashika Capital, BOB Capital Markets and Centrum Finance could not find favour from investors. Response from retail investors to the equity issues managed by different merchant bankers showed a high mean subscription to the issues managed by Systematic Global at 21.81 times. This subscription ratio was 21.39 times for UBS Securities and 15.49 times in case of Nagarjuna Securities. Again, the merchant bankers with low retail investors response to equity issues managed by them included Financial and Management Services ( 0.49 times), Ashika Credit (2.30 times), Ind Global (5.34 times) and HSBC Securities and Capital (India) Ltd (5.99 times). A high variation was found in the subscription ratio of equity issues managed by Fedex Securities, Ashika Credit, Micro Securities Systematic Global. On the other hand, subscription to equity issues managed by Financial & Management Services, Citigroup Global, Edelweiss Capital and HSBC Securities & Capital was found to be more consistent as shown by low coefficient of variation and standard deviation. With respect to subscription ratio from retail investors, again, a high co-efficient of variation was found in the subscription to equity issues managed by Fedex Securities ( 279.93%), Ashika Credit (210%), Micro Securities (181.42%) and Citigroup Global Markets ( 177.55%). A more consistency in subscription ratio from retail investors was found in the equity issues managed by Edelweiss Capital Ltd, Canara Bank, HSBC Securities & Capital and Ind Global. Co-efficient of variation in subscription from retail investors of equity issues managed by these merchant bankers stood at 82.61%, 88.96%, 92.82% and 89.51% respectively. 235

xiv. Public issue of equity by Sankhya Infotech Ltd in 1999-2000 for Rs. 1.67 crore was the highest oversubscribed (283.50 times by all categories of investors and 92.15 times by retail investors) public issue during the period under review. It was managed by Canara bank. This was followed by equity issue of FCS Software Solutions Ltd for Rs. 17.50 crore, which was oversubscribed by 175.88 times (81.92 times by retail investors). Allianz Securities acted as lead manager to this issue. Public issue by Religare Enterprise Ltd in 2007-08 was subscribed by 159.40 times (90.76 times by retail investors). Similarly, equity issue by Sobha Developers for Rs. 569.17 crore was oversubscribed by 113.93 times (20.48 times by retail investors) in 2006-07. Other public issues of equity with the highest subscription in respective years included Spanco Tele System Ltd (80.97 times), Vantel Technologies (57.93 times) in 2000-01 and Power Trading Corporation Ltd. (42.76 times) in 2003-04. xv. During the period under review, primary corporate debt market was dominated by bond issues by ICICI Ltd and IDBI Ltd. The bonds were issued in various tranches with green shoe offer. xvi. IDBI Ltd availed the green shoe option in the years 1998-99, 1999-2000 and 2000-01. The subscription ratio in these years was 1.93, 1.97 and 1.93 times of amount offered to public. It was the highest (3.08 times) during 2004-05 followed by 2.47 times in 2003-04. ICICI Ltd s bond issues were subscribed 1.95 times in 2002-03 followed by 1.69 times in 2003-04 and 1.67 times in 2007-08. However, a poor response by investors to bond issues of ICICI Ltd was noticed in 2001-02 when its subscription ratio was just 0.96 times. xvii. Overall, comparison of public response, in the form of number of times the issue subscribed to the debt issues of ICICI Ltd and IDBI Ltd, it was found that bond issues of IDBI Ltd received comparatively better response in all the years except 1997-98 and 2002-03. 8.4 Suggestions On the basis of the findings of the study, following suggestions are made for the active role of merchant bankers in the management of capital issues with the main thrust on the healthy growth of primary capital market in India. 236

i. Retail investors participation is very limited in the Indian capital market as compared to developed countries. SEBI and merchant bankers need to take some measures to ensure the active participation of retail investors in price discovery through book building method. The issuing companies and lead managers can help the retail investors by offering shares to them at a discount. ii. A scam free investment environment is required to build confidence of the investors in the primary market in India. To protect the interest of investors, SEBI should keep a check on the unscrupulous elements in the primary market. To achieve this, SEBI can create a vast database of new promoters, entrepreneurs and their companies which enter the primary market and monitor their functioning. If any company or its promoters have not done well or have disappeared in the past, they should not be allowed to enter the market again. Merchant bankers can also keep a record of such promoters and companies and should help SEBI in this regard. iii. SEBI provides a lot of information to the public through its website. However internet users are limited in India. So, it should also concentrate on supplying printed material for investor education and awareness particularly in semiurban and rural areas. It may be through a wide network like life insurance agents. iv. There is a potential for growth of retail investor base in India. There are around 1.40 crore investors (demat accounts) in capital market including those in mutual funds. As compared to this, there are over 8 crore persons holding PAN cards of income tax. As per market information, four cities viz, Mumbai, Delhi, Ahmedabad and Kolkata account for over 80-85% trading in cash segment of NSE. Thus, measures should be adopted by SEBI and NSE to involve other urban and rural areas in the capital market. v. A huge potential exists for widening the corporate bond market in India. India s value of outstanding corporate bonds as a percentage of GDP was 1.4% as compared to 7% in China, 20% in USA and 45% in Spain. Most of debt issues are through private placement and public issue of bonds is not popular in India. Further the market for Municipal bonds is non existent. During the period of study, only one Municipal Corporation i.e. Ahmedabad Municipal Corporation issued bonds to the public. Efforts, therefore, should be made to popularize the bonds among investors. 237

vi. The policy of liberalization and globalization in financial sector in India has widened the primary market activities in India. Free pricing, entry of FIIs, institutionalization of investors, PSU disinvestment, requirements of high standard of integrity and transparency have changed the role of merchant banking in India. Primary market is no longer limited to domestic market. So there is need for domestic merchant bankers to tie up with foreign merchant bankers for widening their issue management activities at international level. vii. Merchant bankers as issue managers are responsible for submitting due diligence certificate to the SEBI. The whole exercise of public issue is completed under their guidance. Thus, there is a need to tighten the grip over the merchant bankers. If they are found guilty, they should not be let out only after a warning or nominal fine. Instead, they should be penalized considering stringent measures such as cancellation of registration certificate. viii. Pricing of public issue is the key to the success of the primary market. Lead merchant bankers play an important role in determining the issue price of the securities. The parameters prescribed by SEBI for pricing the public issue have failed in checking the issue prices from being fixed at unrealistic levels. There is a need for revision of norms relating to the basis of issue price by SEBI. ix. The contents of Memorandum of Understanding between the issuing companies and lead merchant bankers are not disclosed in the offer document and are allowed to be inspected at the registered office of the issuing company for a very limited period. It is suggested that the main terms and conditions agreed upon in this memorandum of understanding should be disclosed in the offer document. x. It was noted during the study that there is concentration of merchant bankers in Mumbai. The head offices of merchant bankers are not evenly scattered all over India. SEBI registered merchant bankers with head offices in Mumbai was 57% (83 out of 145) in March 2002, 52% ( 65 out of 124) in March 2003 and again 57% at the end of March 2005. Nearly 80% of merchant bankers registered with SEBI were having their head offices in three major cities of Mumbai, Delhi and Kolkata. So SEBI should facilitate the establishment of merchant bankers in other parts of the country also. 238

xi. Wide network of merchant bankers (retail distribution network) all over India and abroad is required for successful marketing of public issues. Merchant bankers with specialization in management of capital issues were found to have wide network. So, small merchant bankers with limited network should work for increasing their network to compete with leading merchant bankers. xii. There was an increasing trend of companies going public during the period under review. However, on the basis of size of issues, it was found that majority of public issues were floated by well established companies except in 2000-01. The government must develop positive programmes to encourage young and small entrepreneurs to enter the primary capital market for expansion schemes. xiii. Reservation for retail investors in 100% book building process is only 35%, which is very small. It is a hindrance to the expanding investor base in India. Retail investors actively participate in the subscription of public issues. So, percentage shares to retail investors in the public issue needs to be enhanced further to 50%. At the end, it may be said that determination of fair issue price, successful marketing of public issue and more transparency, fairness and integrity by the lead merchant bankers with SEBI as the regulatory body, will boost the primary capital market and confidence of the investors in India. If the merchant bankers and SEBI give the practical shape to the above suggestions, it will help the growth of primary capital market and merchant bankers in India. 8.5 Area for Further Research An attempt has been made in the present study to cover the important aspects of merchant bankers in the role of issue manager in public issues in India. However, merchant bankers perform a variety of functions which are dynamic in nature. The policy of liberalization and globalization has opened many new areas for merchant bankers. The area which needs further research on the role of merchant bankers includes: i. Merger and acquisitions, takeovers. ii. Project counseling iii. Advising in joint venture abroad. 239