29 June 2009

QIP pricing - all is well

I disagreed with Prof. Jayanth Varma, my colleague at the institute, on the pricing related to Qualified Institutional Placements. I think that the current rules are fair and put a floor of two week averages of highs and lows. My points are:

  • The two week's price is not a two week old price and therefore is not a historical price, but a means of calculating a recent price. Any assertion that it is a bureaucratic irritant is incorrect, there is no human intervention and there is an objective price calculation - therefore there is nothing bureaucratic about the pricing.
  • There is nothing arbitrary about the two week pricing - at least nothing more than yesterday's price or yesterday's price at 3.00 pm.
  • I am all for a floor price - we saw 15 years back the kind of misconduct which occurred when private placements were made at steep discounts to the market price. In fact, whereever the law permits, the shareholders are always shortchanged - e.g. takeover regulations permit a 25% premium as non compete fees to the exclusion of public shareholders - and suspiciously all trasanctions with non compete are at exactly 25% levels.
  • Finally, I don't think there is an inherent right of a company to issue shares to the exclusion of existing shareholders. Private placements (including QIP issues) are exceptions to the rule. The rule being rights offerings and public offering in that order.
See the transcript on CNBC

No comments: