Quota vs auction: SEBI is in dilemma

New Delhi: Market regulator SEBI is exploring various options including doing away with quota system for public offers in the face of the recent multi-crore IPO scam.

Because of quota system for the benefit of retail investors, there has been large scale cornering of shares by big bulls for price manipulation leading to the IPO scam during 2003-05.

Armed with a suggestion by Economic Survey for 2005-06 that it was time to move away from quota system to unified auction, SEBI was exploring the possibility of shifting away from the quota system, that creates artificiality in the market resulting in price manipulation.

Both the Finance Ministry and SEBI are grappling with the issue but they are not so far come up with alternative to replace quota system aimed at protecting the interests of small investors.

The existing quota system as well as unified auction has its own advantage and disadvantage, a Finance Ministry official told PTI.

If there is unified auction, big players will corner a major chunk of public offers, leaving little for small investors, he explained.

However, quota system creates artificiality, giving room for manipulation in allocation process of public issues, he said.

This is a dilemma, which the government and market regulator are grappling with and so far no solution seems to have emerged.

As per the existing system for public offers through book building route, 35 per cent of the total issue size is fixed for retail investors, 50 per cent for qualified institutional investors and 15 per cent for high net-worth individuals.

A retail investor is the one who applies for shares of value up to Rs 1 lakh in a public issue.

The current system of quota-based allocation drew flak after SEBI unearthed major irregularities in two major public issues of Yes Bank and IDFC.

Economic survey for 2005-06 pointed out that individual investors placed multiple bids in the IPO auctions to benefit from the quota that has been made available to individual investors.

The experience emphasises the need to shift away from a system of quotas to a non-discretionary price discovery through a unified auction in a framework which is a close to the price discovery of the secondary market, the survey said.

Unearthing a scam in Yes Bank issue, the market regulator found that one Roopalben Panchal received 150 shares each from 6,315 allottings through off market transactions, aggregating 9,47,250 shares.

Out of 6,315 entities, as many as 6,221 entities have same address as that of sister of Roopalben Panchal, with whom Pachnal holds joint dematerialised account.

Besides, 50 and other 44 entities have same addresses, according to SEBI.

Unearthing similar scam in IDFC public offer, SEBI found that the same Roopalben Panchal received 266 shares each from 12,253 demat accounts aggregating to 32,59,298 shares and 532 shares each from four dematerialised accounts aggregating to 2,128 shares.

Delivering its interim order on the IPO scam, SEBI had barred 24 operators, including Karvy Stock Broking and India Bulls from trading in market. However, the next day SEBI had put in abeyance its order, barring India Bulls following the company's submission before it.