Balakrishnan: I did not receive any letter from Regupathi when I was CJI

Source :The Hindu, Delhi:December 8, 2010

National Human Rights Commission (NHRC) chairman K.G. Balakrishnan on Wednesday denied reports in a section of the media that the former Madras High Court Judge, Justice R. Reghupathi, had written to him when he was the Chief Justice of India (CJI) alleging that the former Union Telecom Minister, A. Raja, had tried to influence him. Justice Balakrishnan also denied that he had suppressed that letter.

“Such reports cast aspersions on me, that I had committed dereliction of duty… The allegations are absolutely incorrect,” he said in a statement here. Justice Balakrishnan made it clear that he had not received any such letter or communication directly from Justice Reghupathi while he was in office.

Gokhale’s report sought

When the media reported the incident, at that time Justice Balakrishnan sought a report from the then Chief Justice of the Madras High Court, H.L. Gokhale, and the latter sent him a report wherein nothing was mentioned about the name of any Union Minister having talked over phone with Justice Reghupathi to influence him. “Therefore, there was no occasion for me to talk to the Prime Minister or to take any further action.”

‘Facts disclosed’

Justice Balakrishnan said he had disclosed these facts at the relevant time. “Moreover, if anything happened like that, which amounted to interference in the judicial function of Justice Reghupathi, he himself could have exercised his powers of contempt of court for which no permission is required from the CJI.”

‘Facts can be verified’

“It appeared that Justice Reghupathi made a statement that he reported the matter to the Chief Justice and he certainly meant the [then] Chief Justice of the Madras High Court and not the CJI,” Justice Balakrishnan said, adding that these facts may be verified.

The letter, which was written to him by Justice Gokhale, might be available in the office of the present Chief Justice, Justice Balakrishnan said.

Court orders suspension of Chairman of Tamil Nadu Bar Council

Source :K.T. SANGAMESWARAN:The hindu:CHENNAI, December 7, 2010

The Madras High Court on Tuesday ordered the suspension of the membership of R.K. Chandramohan and consequently his Chairmanship of the Bar Council of Tamil Nadu and Pondicherry (BCT) forthwith for an alleged attempt to influence a High Court Judge using the name of the then Union Minister A. Raja in a matter relating to an anticipatory bail plea.

In its 78-page common order on two public interest litigation petitions, a Division Bench comprising Justices F.M. Ibrahim Kalifulla and M.M. Sundresh said that apart from attempting to influence the Judge R. Regupathi (since retired), Mr. Chandramohan was stated to have behaved, in the words of the Judge, in a very unruly manner in the open court.

The Bench said the petitioner should file a formal complaint, along with the High Court order, to the BCT within two weeks. He should file a complaint copy with the Bar Council of India (BCI) simultaneously. Mr. Chandramohan should not be permitted by the State Bar Council to function as chairman pending disposal of the disciplinary action by the BCI.

In a petition, the petitioner, Elephant G. Rajendran, sought a writ against Mr. Chandramohan directing him to explain under what authority he held the office as Chairman of BCT. In the other petition, he sought a direction to the BCI to initiate appropriate action against the BCT Chairman.

The petitioner submitted that an anticipatory bail application filed by a medical practitioner came up before Justice Regupathi on June 29 last year and Mr. Chandramohan appeared on behalf of the accused. During the hearing, the Judge stated that “a Union Minister had called me to exert influence in favour of accused and to release the petitioner/accused on anticipatory bail. You yourself know everything.”

The petitioner contended that Mr. Chandramohan's conduct in casting aspersions against the Judge was gross contempt and interfered with the administration of justice. He had used the name of a Union Minister for achieving an illegal action. Therefore, he should be disqualified from the post.

Following a direction from the Judge, the High Court Registry produced a letter dated July 2, 2009, written by the Judge to the Chief Justice of Madras High Court in which he had stated that on June 12, 2009 while he was in his chamber, Mr. Chandramohan met him and said that two persons who were family friends of the Union Minister had filed the petition for anticipatory bail in a criminal case and it must be considered favourably. He also handed over his mobile phone saying that the Union Minister was on the line to talk to the Judge.

Right away, the Judge said, he discouraged such conduct and told Mr. Chandramohan that the case would be disposed of in accordance with law. On June 29, in the open court the advocate vociferously remarked that the court was always taking sides with the prosecution and not accepting the submission made by the counsel for the accused in the case while giving importance to the prosecutor. Later, the Judge directed the Registry to place the papers before the Chief Justice for posting the case before some other Judge.

In its order, the Bench said there was no reason to doubt the veracity of the Judge's statement in the absence of allegations of ill will or mala fides against the Judge. The conduct of the BCI Chairman in having maintained silence in his counter affidavit went to show to a very large extent that in effect he admitted the allegations. He neither repented nor displayed any conduct of remorse. If really such an incident had not taken place, the first person to have refuted the Judge' s statement should have been Mr. Chandramohan.

The Bench observed that the Judge's reaction was much more courteous than was expected. What had been alleged against Mr. Chandramohan by the Judge did call for stringent action at that point of time itself by handing him over to the appropriate authorities. Unfortunately, Mr. Chandramohan instead of realising the Judge's magnanimous attitude displayed a much more disastrous attitude by behaving in an unruly manner in the court hall when the Judge had no other option except to reveal in the open court the monstrous and unpardonable behaviour of the advocate.

It said the magnitude of the behaviour of Mr. Chandramohan “was unprecedented and the same had to be dealt with an iron hand to ensure that such a behaviour was not even dreamt to be attempted by any other unscrupulous element under the garb of wearing the glorious robes of an advocate.”

Having regard to the order passed and directions issued, the Bench said it was not now inclined to take any proceedings for contempt.

Full text of R. Regupathi's letter to Madras High Court Chief Justice

Source :The Hindu:CHENNAI, December 7, 2010

The following is the letter dated July 2, 2009 written by R.Regupathi, then Judge of the Madras High Court, to the Chief Justice of the Madras High Court containing the relevant part where there is a specific reference to R.K.Chandramohan.

(By an order on Tuesday, a Division Bench comprising Justices F.M. Ibrahim Kalifulla and M.M. Sundresh ordered the suspension of the membership of Mr. Chandramohan and his Chairmanship of the Bar Council of Tamil Nadu and Pondicherry.)

“On 12.06.2009, at about 2 p.m. during Lunch Recess, while I was in the Chamber, High Court, Madras, my Office Assistant, Mr. Mujibur Ali, informed me that Mr. Chandramohan, Chairman, Bar Council of Tamil Nadu, is waiting and seeking for an appointment to meet me and, immediately, I allowed him to come in. To start with, he discussed about the general subject on Advocates and so proceeding, he said that two persons, who are father and son/accused in a criminal case, are family friends of a Union Minister by name Raja, and that the petition filed by them for anticipatory bail must be considered favourably. Simultaneously, he handed over his mobile phone by saying that the Union Minister is on the line to have a talk with me. Right away, I discouraged such conduct of Mr. Chandramohan and told him that the case would be disposed of in accordance with law, if listed before me.

“Subsequently, on 29.06.2009, second anticipatory bail petition came to be filed for the same accused and on behalf of Mr. Chandramohan (counsel on record for the petitioners/accused), who was present in the court, Mr. Masood, Advocate, argued by stating that some new points need to be submitted and, for such purpose, the Case Diary must be summoned. Adverting to the counter filed by the prosecution and referring to the view I had already taken during the previous occasion and pointing out that there was no change of circumstance to positively consider the case of the petitioners, it was conveyed that there was no valid reason or ground to grant the prayer in the 2nd petition. It was also observed that the counsel may argue the case in detail, however, this time orders would be passed on merits and they would not be allowed to withdraw the petition. Again, the counsel insisted that the case diary must be called for and the case be heard in detail with reference to the materials collected during the course of investigation. I have impressed upon the representing counsel by explicating that a like direction could be given to the prosecution only in the event of the Judge satisfying that such course is inevitable and absolutely necessary in a given situation and that, on mere demands and as a matter of routine, such exercise cannot be undertaken.

At that time, Mr. Chandramohan stood up and made a similar demand and when I emphatically declined to accede to his adamant demand, he vociferously remarked that the court is always taking sides with the prosecution and not accepting the submissions made by the counsel for the accused while giving importance to the Prosecutor. On such pointless remark, I said that the counsel engaged to argue on his behalf has made his submission and he is not supposed to pass such slanderous and derogatory remarks; for, all these days, the court has been passing orders after hearing the parties and assessing the cases on their own merits and in accordance with law. In spite of that, Mr. Chandramohan, insisted that the Case Diary must be summoned and the matter be adjourned to some other day. Since Mr. Chandramohan highly raised his voice and his approach towards the court was quarrelsome, I told him that a person like him, an advocate holding position as Chairman of a State Bar Council, should not behave in such a fashion. Still the learned Advocate was outburst and uncontrollable, and I observed that a counsel, who made an attempt to exert influence on the court by using the name of a Cabinet Minister, cannot be allowed to succeed in snatching an order in his favour by advancing threat. Due to such odd experience, I had to direct the Registry to place the papers before Your Lordship for obtaining orders to post the case before some other learned Judge.

“The case concerned was taken up at the end in the afternoon and inside the court hall, there were about 4 to 5 Advocates present and no one from the Press was there. That being so, the oral observations actually made came to be translated by the Print and Electronic Media with their own interpretations and ideas …….

“I have written this letter/report to apprise Your Lordship the actual state of affairs Involved.”

scams India - N. Vittal - Interview

T.M. KARUNAKARAN

N. VITTAL: "CORRUPTION depends on three factors: values cherished by people at the individual level; values cherished by society; and the system of governance."

IN the context of the 2G spectrum allocation scam and the scandals relating to the Adarsh Housing Society in Mumbai and the Commonwealth Games in New Delhi, Frontline met N. Vittal, a former Central Vigilance Commissioner (CVC). The 72-year-old Vittal is a former Indian Administrative Service (IAS) officer who, before becoming the CVC, was Chairman, Telecom Commission, and Secretary, Department of Information Technology. He lives in Chennai. Excerpts from the interview:

The office of the CVC during your tenure in the post was proactive and transparent, leading to exposes on corruption in the bureaucracy. In the light of that experience, how do you look at the present level of corruption involving the bureaucracy, politicians and the top brass of the defence services in scams such as Adarsh Cooperative Housing Society, Commonwealth Games and 2G spectrum?

I was Central Vigilance Commissioner from September 3, 1998, to September 2, 2002. During my tenure, I tried to ensure that cases regarding corruption were looked into seriously and quickly.

You mentioned about exposes. It is not the function of the CVC to do exposes on corruption or do investigations of its own. The CVC is an authority that is meant to exercise supervision over the vigilance function of the Government of India departments and render advice to the Government of India, especially the disciplinary authority, for specific action they have to take for cases coming under the Prevention of Corruption Act at the level of group A and B officers.

During my tenure, I tried to see how best the basic objective of fighting corruption could be achieved within the limited power of the Central Vigilance Commission…. I brought transparency, effectiveness and visibility to the system. I brought transparency by using the Internet, and all information was available on the CVC website cvc.nic.in

We used the Internet to expose the names of IAS and the IPS [Indian Police Service] officers who had been found guilty of corruption and against whom major penalty had been recommended and the CVC had recommended prosecution. This created a big impact. In a criminal case, thanks to the IPC [Indian Penal Code] and the CrPC [Code of Criminal Procedure], an accused is presumed innocent until proved guilty but his name is widely known.

Unfortunately, under the anti-corruption law, when an officer is proceeded against, there are two options: prosecution in a court of law, which is undertaken only in cases where the evidence is sufficient and the guilt can be proved under the Evidence Act. [In the second option], in most of the cases, where the strength of proof is not beyond reasonable doubt, it is sufficient to come to a conclusion under the principle of preponderance of probability. [That is] Circumstantial evidence is sufficient to hold a person guilty.

That is why 4,000-plus names were put on the CVC website where the departmental inquiry had been held and the CVC had recommended that they should be given major punishment such as dismissal, reduction in rank and so on.

This was the first time it was done and it brought a lot of visibility to the CVC. Secondly, I was easily available to the media because this was a subject on which I used to give 100 lectures every year. In four years, I gave 400 lectures. Thirdly, I went beyond the administrative issues on what citizens should do to fight corruption. That is why I came up with a citizen's guide to fighting corruption. I introduced the observance of Vigilance Awareness Week every year, which has continued for the past 10 years. So, in all the departments of Government of India, the need for vigilance and fighting corruption was brought about and greater awareness created.

But the CVC's recommendations are only advisory in nature and its jurisdiction covers only Government of India organisations. It does not cover State government organisations, politicians and so on. If a complaint came up against a politician, what should the CVC do? Should the CVC take a stand that it is beyond its power and keep quiet or can the Central Bureau of Investigation [CBI] inquire into political corruption where the CVC has no jurisdiction and the CBI reports to the CVC?

What did you do?

Whenever a complaint of corruption came up against a politician, I used to send it to the CBI Director for action/investigation. For example, Subramanian Swamy met me soon after I took over as the CVC and gave an application to me, during my morning walk, against the then Minister Ram Jethmalani. I sent it to the CBI Director, R.K. Raghavan, and the matter was inquired into…. With the complaint he [Swamy] made no damage was done. The case was finally closed. Here, as the CVC, I used my power on the ground that the Director of the CBI is selected from the panel recommended by the CVC and others as members of a selection committee. This was on the directives of the Supreme Court.

Does the Supreme Court judgment say that the CBI Director should be appointed….

The whole idea was that in the Vineet Narain case the Supreme Court realised that two key government agencies, the CBI and the Enforcement Directorate, were being manipulated to delay the cases. It wanted to make the CVC an independent agency that can supervise the functioning of the CBI and the Enforcement Directorate, and this was to ensure that these organisations functioned independently. Further, the tenure of the Directors of the CBI and the Enforcement Directorate was assured [for a minimum of two years] and they could not be transferred without the permission of the CVC.

Since I put everything on the website, I was able to monitor how many of the recommendations of the CVC were implemented. I discovered to my horror that for two years and more, many recommendations of the CVC were not implemented. So I took up the matter with the secretaries of the disciplinary authority, saying that after the departmental inquiry the CVC had recommended a major penalty such as dismissal or reduction in rank, and if, as the disciplinary authority, ‘you do not carry it out, it can only mean two things: either you are inefficient or you are colluding with the corrupt'.

This made the disciplinary authorities take follow-up action. This improved the effectiveness of the CVC's recommendations and I am happy to say that during my tenure, 98 per cent of the recommendations were implemented. So visibility, credibility and effectiveness were assured.

I retired in 2002. Mercifully for this country, there has been an explosive growth of television news channels and of the print media, particularly in the regional languages. The media are doing an excellent job of making India what Zulfiqar Ali Bhutto called “a boisterous democracy”.

There is a school of opinion that what we are witnessing now is the cumulative effect of the rampant corruption that has prevailed for the past 20 years. Do you agree?

Looking at the issue as a sort of historical process where the dosage is going up incrementally does not give you a real understanding of the dynamics of corruption.

Corruption depends on three factors: values cherished by people at the individual level; values cherished by society; and the system of governance.

Each one of us has seen that even in the most corrupt government departments, there are honest people. How do you explain this phenomenon? It is the result of an individual's values. Former President [A.P.J.] Abdul Kalam has emphasised that values should be cherished, and this can be done only by parents, primary schoolteachers and peer pressure in the initial years of a person's life.

Societal value depends on what the leaders in society do. How many doctors, lawyers, chartered accountants, businessmen and successful people who are respectful people in society declare their real income and pay full income tax? If more than 50 per cent of our economy today is black money, it means that all these people as a class are under-reporting their income and creating a parallel economy. Since politicians are very visible in a democracy, blaming them alone is not correct. Societal values have deteriorated.

When I became the CVC, I sent a circular [to government departments], asking them whether we can display the photographs of corrupt people who have been found guilty and punished, just as photographs of criminals are displayed in police stations.

A reply I received said if I did that in their office, there would be no place on the wall for Mahatma Gandhi's picture! Another man from a public sector bank asked, “If you do that in our bank, who will do business with our bank?”

The third important aspect is that the system of governance decides the level of corruption. In Chennai, one can throw rubbish anywhere one wants.

. But when the same people go to Singapore, they will not throw rubbish on the roads because they know that the system there will punish them. What we have done in our country is to design a system that encourages corruption. Having done that, to say that today's corruption is an accumulation is wrong.

Mahatma Gandhi collected money for every signature he gave. Sardar [Vallabhbhai] Patel was in charge of the Congress' organisation. He handled lakhs of rupees. Can anybody point a finger at Sardar Patel that he took a penny away from the party?

 The Dewan of Mysore, Mokshagundam Visvesvaraya, used personal ink and pen for his personal work, and government ink and pen for doing government work. Such was the level of integrity we had seen in politics and the bureaucracy.

When we became independent we used to cast our votes in elections. Now we vote our caste. As P. Sainath [rural affairs editor of The Hindu] has pointed out and the Election Commission itself has conceded, elections have become an exercise where humungous amounts of money, that too black money, are required.

Every political party is against corruption when it is in the opposition. Once it comes to power, it has to play the game. When it is caught, it will always point the finger at the opposition party that was earlier in power and played the same game.

Corruption caters to the basic human tendency of greed. Today, people want to grab power to make money or grab money to come to power. It is a vicious cycle and the question is how to break that cycle.

When you were the CVC, you listed five major factors that resulted in corruption in India. They were: (1) scarcity of goods and services; (2) red-tape and complicated rules; (3) lack of transparency in decision-making; (4) legal cushion for the corrupt under the principle that a person is innocent until proved guilty; and (5) tribalism among the corrupt, who protect each other.

Corruption in our country is a vicious cycle in which the entire society is somehow involved…. Now muscle power and technology have led to such a development that a voter can be bribed and monitored. Short of getting into the voters' booth and monitoring, there are methods to see that a voter once corrupted stays corrupt.

Is there any addition to the list of five?

In the dynamics of corruption, there are five elements: the neta, the babu, the lala, the jola [represented by non-governmental organisations] and the dada.

Neta is political corruption. It leads to bureaucratic corruption. There is business corruption. Then there is NGO corruption. The NGOs are a global phenomenon by which a lot of money comes to them. There is the Foreign Contribution Regulation Act (FCRA), which itself is a well of corruption. Many NGOs used to tell me that for whatever money they get from the Ministry of Social Welfare, they had to pay a bribe. If you go to Bihar, there are ghost NGOs siphoning off money. So these jola walahs have become another area of corruption. Then [there is] the dada, the criminal. What is the reason for terrorism or Maoism growing? Corruption.

What is the way out?

There are institutions to fight corruption. The first is the judiciary. However slow it may be, it has taken a number of measures to fight corruption. Even now it is the Supreme Court that is highlighting corruption in many areas and doing something. Secondly, the Supreme Court, through public interest litigation [PIL], has been able to strike a blow for citizens' rights. In 2004, a Supreme Court judgment that every candidate [contesting an election] has to declare the number of criminal cases filed against him, his educational qualification and his wealth brought about a great element of transparency in the electoral system.

The entire political class shows that it is afraid to face transparency. Why has the Lok Pal Bill been pending for 30 years? It was introduced in the Lok Sabha eight times. Politicians have lost their credibility. They cannot fight corruption because they thrive on it. The way out is to create a system like the one in Singapore.

The second agency [that can fight corruption] is the Election Commission. T.N. Seshan made a great contribution to better governance by educating the people about the powers of the Election Commission. He cleaned up elections and brought about some discipline by insisting on a code of conduct for candidates.

 The Election Commission's power to derecognise political parties and cancel elections is working on politicians.

The third is the CAG [Comptroller and Auditor General]. But it has a very limited role. Unfortunately, a great weakness of the CAG is that it is mostly post-audit. The fourth agency is the CVC. But it does not have direct powers. It has to fight with a wooden sword. That is what I did for four years.

A great mystery of our democracy is that in spite of so much of wealth declared by politicians in their election affidavits, agencies such as the Income Tax Department and the Enforcement Directorate watch silently. Has any head of the Central Board of Direct Taxes, Customs, Excise or the Enforcement Directorate asked how a politician in one election declares his/her wealth at Rs.4 crore and in the next as Rs.8 crore? Only when they are directed by political leaders in power to act against opposition parties they move.

The Supreme Court has asked whether P.J. Thomas can function effectively as the CVC when a charge sheet is pending against him in a case in Kerala. He was earlier Telecom Secretary. What is your view on this?

[James Michael] Lyngdoh, [former Chief Election Commissioner], whom I know as an honest officer, has said Thomas is a man of personal integrity. I do not know Thomas personally. So I will not say anything about him as an individual.

But I have a comment on an issue that the Supreme Court has raised and a point made by Attorney General G.E. Vahanvati. The point is, ‘Is impeccable integrity a requirement for every job?' Vahanvati's point is that if that is made a condition for every job, there are petitions pending against even the appointment of judges.

I will give the reason why a person of impeccable integrity should be considered for the post of the CVC: (1) Justice should not only be done but also be seen to be done. If the CVC is a man of impeccable integrity, then whatever action he takes will be believed.

The question the Supreme Court raised was that if the CVC himself is facing a charge, then in every case [he is inquiring into], an application can be made that he is facing this [the charge].

Do you agree with the view that liberalisation and globalisation have taken corruption in India to very high levels that were non-existent during the licence-quota raj?

I think this is in the Global Financial Integrity report. Liberalisation has brought a lot of good for the country. Economic development has taken place. A telecom revolution has taken place. Another sector, information technology, has brought in so many employment opportunities.

But the question is, has it increased corruption? Liberalisation has led to mega corruption. Earlier, under the permit-licence raj, it was retail corruption because individuals were trying to get licences. After liberalisation, politicians can make money only by mega corruption, which can come only through policymaking.

 After liberalisation, the capital market became dominant. So you had the Harshad Mehta and Ketan Parekh scams.

The second is the sector-related scam. Sector means policy. Mr Ratan Tata talked about how he was prevented in the aviation sector [from starting an airline]. The simple policy change was that we opened up the aviation sector but said a foreign partner should not come into the aviation business. Imagine a policy like this being made! Ratan Tata has been pretty open about what happened. The policymaking that is involved has made the scale of corruption mega.

Do you think the 2G spectrum scam also took place because of the policy change?

Because corruption-minded people were there. After all, in the 3G spectrum allocation, corruption did not take place. The enormous money realised from the 3G auction highlighted in sharp contrast the extent of the 2G scam.

Source ;

Volume 27 - Issue 25 :: Dec. 04-17, 2010

IPO- P N B

 















Mr P. K. Anand (left), Executive Director, Punjab and Sind Bank, with Mr H.S. Makker, Chief GM, at a news conference to announce the bank's IPO in Mumbai on Wednesday.

Source :BL Bureau Mumbai, Dec. 8.2010

Price band at Rs 112-113; plans to raise Rs 480 cr.

 Punjab and Sind Bank said on Wednesday that its initial public offering will open on December 13.

 The bank is proposing to enter the market with a fresh issue of four crore shares and will raise close to Rs 480 crore through the issue.

The IPO will constitute 17.9 per cent of the post-issue share capital of the bank.

 The Government's stake in the public sector bank will decrease from 100 per cent to 82 per cent after the IPO.

Discount to investors

The issue will close on December 15 for Qualified Institutional Bidders and on December 16 for other investors. The price band has been fixed at Rs 113-120 and a five per cent discount to the issue price has been given to retail investors and eligible employees of the bank.

The proceeds from the issue will be used to augment the bank's capital base to meet its future capital adequacy requirements and the growth in its assets, mainly its loan and investment portfolio.

Punjab and Sind Bank has been seeing a compounded annual growth rate of 28 per cent in credit and 36 per cent in deposits over the past five years.

Despite high growth, the bank has contained its non-performing assets through aggressive provisioning and recovery, said Mr P.K. Anand, Executive Director.

In the first half of the current fiscal, gross NPAs were 0.92 per cent and net NPAs were 0.44 per cent.

The provision coverage was at 86.83 per cent, against the mandated regulatory requirement of 70 per cent.

Net profit was Rs 276 crore. Net Interest Margin was at 3 per cent.

Focus on cash

The share of low-cost current account savings account (CASA) was at 25 per cent, which would be a focus area for the bank, going ahead, said Mr Anand.

The bank will look to moderate growth to some extent, but would continue to maintain credit growth at 1.25 per cent higher than industry growth rate.

According to Basel–II norms, the bank's Tier–I capital is 7.98 per cent and capital adequacy ratio is 13.1 per cent as on end-September.

Post the IPO, CAR would be around 14 per cent and Tier I would be approximately above 9 per cent, Mr Anand said.

Rating agency, CARE has graded the issue 4/5 indicating above average fundamentals.

The Qualified Institutional Bidders have been allotted 50 per cent of the shares, retail investors 30 per cent and High Networth Individuals 10 per cent.

SBI Capital Markets, Enam Securities and ICICI Securities are the book runners lead managers of the issue.

How to play the IPO game

Source :Moneylife Digital Team:Dec 3,2010

IPO mania is here again.


 But as a Moneylife research study shows, there is only one way to play the game. Debashis Basu, Sanket Dhanorkar and Pratibha Kamath explain.


 Plus a survey of readers’ opinion on key issues regarding IPOs


It is that time again when companies queue up to raise heaps of public money from primary markets. With stock markets trading tantalisingly close to their historic peaks, the upbeat market mood is perfect for taking a splash in the money pool. After all, the opportunities in the wake of a booming stock market are simply too mouth-watering for promoters to ignore. We have already seen a flurry of activity in the primary market which is threatening to turn into a glut.

CFOs will be hard at work to dress up the company financials and present a rosy picture to investors. Investment bankers will be spending countless hours managing disclosures in prospectuses and planning a marketing blitz around the issues. Promoters will be smacking their lips in anticipation. After the dust settles down on this party, the promoters and bankers will have fattened their wallets while clueless investors will be left licking their wounds, baffled at the steady fall in post-issue price. But, if you have the stomach for it, there is a way you can turn the tables on the promoters and beat them at their own game.

Putting it simply, there can be three options for you as an investor in IPOs. IPO performance data over the past three years shows that one of these is a winning strategy and the other two are not. Here is an analysis of investment in IPOs under the three options and what could have been your returns in each case.

Scenario 1: Staying the course
‘Buy and hold for the long term’ is a strategy often advised to investors who wish to earn decent returns on equity investments over the long term. It does make sense to follow this strategy for picks in the secondary market, because one is able to buy high-quality stocks at a reasonably low price from time to time when the market crashes and also as long as one is not married to the scrip. But anyone bringing this idea to the primary markets is running a fool’s errand. Investors who had bought at the issue price and held their investments in their portfolio would be staring at large losses.

 Here are the bare facts.

 A whopping 60 out of the 107 companies that have listed in the past three years are now trading below their issue price! A 44% chance of making money on one’s investment is hardly encouraging. Of these 107, only 12 are still showing a price appreciation of 100% or more (as of 20th October) while 23 stocks are trading at less than a third of their issue price.



The average return investors would have earned had they invested in all 107 public issues would be 15%. The Systematic Investment Plan over three years in an index fund would have earned you almost double that amount.

 Even this 15% is due to a high degree of skewness. Some issues that have done exceedingly well are clear cases of price-rigging and manipulation. Indeed, the median return on investment for the buy-and-hold investor in this scenario would be a pathetic -4%.

 So, if you are looking to buy at the time of issue and sticking to your guns no matter what, you are essentially playing a zero-sum game. It could pay rich dividends if you know about stocks that would be rigged up in the secondary market. Else, you could find yourself in a very deep hole.

Among the IPOs that stand out, Kiri Dyes & Chemicals is now quoting at a 316% premium to its issue price. Midfield Industries and Bedmutha Industries have run up 224% and 174%, respectively, over their issue price, within a matter of weeks. Our market sources whisper of market manipulation with ease. Meanwhile, stocks like Bang Overseas and Resurgere Mines & Minerals India have tanked 76% since the issue. Even stocks from supposedly high-growth sectors, like KSK Energy Ventures and Gammon Infrastructure Projects, are trading 28% and 31%, respectively, below their issue price.

Scenario 2: The Sitting Duck
What would be the outcome for someone wanting to get in at the time of listing of the stock and holding on to his investment? The situation would be grim, to say the least. Out of the 107 public issues over the past three years, as many as 65 are now trading below their listed price! This means investors have only a 39% chance of getting something back on their investment in this scenario.

Looking deeper, we observed that 30 stocks are now trading at less than a third of their listing price while only a handful of stocks have witnessed a price appreciation of more than 100% since listing. 

Worse still, had you invested in all of these 107 companies at the time of listing, you would now be sitting on a paltry 4% average return. Of course, this figure would have been even lower but for a few stocks that might have been manipulated, generating higher returns.

 The median return on investment in this scenario is a frightening -14%! Essentially, an investor making an entry into the stock on listing day is no better off than a duck during hunting season.



As we said, a handful of stocks have exhibited robust growth even after listing. These are among the small breed that have worked their magic on the back of that rare combination: low offer price and robust earnings growth. 

Prominent among these are Jubilant Foodworks (up 209% since listing), Rural Electrification Corporation (up 180%) and J Kumar Infraprojects (up 129%). Among the recent issues to have hit the market, Aster Silicates, Tirupati Inks, Emmbi Polyarns and Tarapur Transformers have turned sour since listing. What could be the reason behind such measly returns post-listing?

 For that, we need to delve into the third and last scenario—the listing-day phenomenon. 

Scenario 3: Playing the Flipping Game
Ask any smart investor the reason for wanting to invest desperately in an IPO. Almost always, the answer will be: gains that come by flipping on listing. The price pop that is generally associated with the listing of a stock is why investors are so attracted to an IPO.

 Numbers support this. An astounding 95 stocks that hit the market in the past three years got listed above their issue price. This means that an investor has an 89% chance of adding value to his investment on the listing day itself.

 On an average, these stocks would have yielded investors gains as high as 11% had they exited at the time of listing. As many as 44 stocks have yielded more than 10% on listing. To put things in perspective, out of the 15% returns that investors have so far clocked on the issue price of these stocks, 11% was captured at the time of listing itself! This means that almost 75% of the gains were accounted for at the time of listing. This explains why the returns post-listing were so abysmal, at least in the past three years.

Among the stocks that have seen a substantial pop at the time of listing: DQ Entertainment, with a massive 69% price pop, followed by Career Point Infosystems (49%) and NMDC (46%). DQ Entertainment and NMDC have, since, suffered a plunge of 13% and 37%, respectively, while Career Point Infosystems has inched up 7%. Interestingly, companies that have tanked dramatically since listing showed a substantial jump on listing day. Future Capital Holdings, Rishabdev Technocable and Tirupati Inks were among those that got listed at a huge premium and went downhill subsequently.

The Inconvenient Truth So what should an investor do? The obvious conclusion one can draw is that there is only one way to make money from a public issue—to play the promoters’ own game, but play it even better. And that is to flip the scrip—get in and out before all hell breaks loose.

 Remember, the Reliance Power IPO debacle?

 The stock opened at a 22% premium over its issue price, but now finds itself down 54%. Although we do not recommend investors to practise such a strategy, this is the unfortunate truth. Investors seem better off playing the shorter format of the IPO game rather than testing their mettle in the longer format. That is what most investors look to do—hit a six and get out instead of grafting a painful innings out in the middle.

But this is the very nature of the primary market, as we have pointed out several times in the past. To put it simply, IPOs are a typical bull market phenomenon and at that time pricing goes haywire. As we have seen in 1994, 2000 and, recently, in 2007, a rush of IPOs happens only when things look extremely rosy. A persistent and untrammelled rise in stock prices has always attracted a flood of IPOs.

 It is then that investment bankers collude with companies to stick expensive stocks on you. This keeps happening in cycles—IPO mania is at its peak during booms but new issues are conspicuous by their absence when the market is down for a prolonged period. In the bear phase between February 2008 and 2009, only 33 issues came up for listing. However, the phenomenal rally since March 2009 has brought in its wake 74 public issues till date.

Toss in a hot stock in a bull market and the stock should do well, right? This is where one essential feature of the IPO market comes into play, almost guaranteeing that you will lose money: You have no choice over the price you pay. 

It is promoters and investment bankers who decide the time and price for their public issue that suits them the best. And they are only interested in the highest possible price. A bull market is a seller’s market. This is why IPOs can rarely come cheap your way. But that is the very reason while prices unravel in the post-issue phase. 

All the issues that have failed were not only hit by the changed market climate but also by unreasonably high pricing. 

That is the nature of the IPO game. So, the lesson is simple.

 Avoid IPOs if you can and if you are, indeed, tempted to subscribe, flip it on the first day. IPOs are rarely more than one-day wonders.