As it is increasingly becoming the case these days, the Union Budget following the Economic Survey turned out to be 'the calm after the storm.' One issue that generated a heated debate after the Economic Survey is the proposal to do away with the retail investor quota for public issues of shares.

The ostensible reason behind this proposal seems to be the now infamous 'Roopal Panchal' demat scam, wherein a seemingly well organised cartel of market operators, in collusion (intentional or otherwise) with some banks and clearing houses, was milking the existing public issue allotment system.

If any progress has at all been made in this case, well, a deathly silence has become the order of the day. But this can hardly help in boosting the investor confidence, which incidentally is one of the Sebi's (Securities and Exchange Board of India's) perceivable objectives.

Currently, Indian IPOs/FPOs are marketed across three investor categories - qualified institutional buyers, non-institutional buyers/high networth individuals and retail individual investors - who have reservation of 50 per cent, 15 per cent and 35 per cent, respectively.

The proposal now, it seems, would be to simply 'auction' shares without any reservation across investor categories. Now, it doesn't take a rocket-scientist to tell which investor category not just loses out, but is, for all practical purposes, eliminated, if such a method were to be adopted.

For a government that claims sensitivity to the claims of the 'Aam Aadmi' (the common man), one wonders whether the move to all but effectively eliminate the direct participation of the retail (read small) investor from the primary market is a smart one.

Given the propensity of scams to pop up (of course, even as the Sebi watches), Indian retail investors are, rightly or wrongly, more inclined to participating in the equity market directly through the primary - rather than the secondary - market route.

To the market regulator's credit, during this bull run, it has succeeded in keeping the riff-raff out of the primary market (at least till very recently), thereby facilitating active participation by the retail investors in IPOs and FPOs.

This has been amply borne out by the subscription figures.

Of course, with listing gains growing by the day, the dangerous 'grey market' syndicate, about whose existence every market man worth his salt knows, was bound to grow more ambitious.

The Roopal Panchals of this world are a product of that perverted system which should have been busted long ago. Just for the record, they pre-date even the Sebi and they lose little time, if at all any, in starting the 'unofficial trading' in the shares of a company even when the IPO is open for subscription.

That, in 2006, such a 'path-breaking' discovery about the abuse of the primary market system was made is hardly worth cheering from the aisles.

Three decades ago, the finance ministry had issued guidelines directing companies to reverse the seven-digit serial numbers on the application forms for their IPOs and generate new serial numbers during allotment. This was done so that applications bearing sequential numbers are not assured of firm allotment in cases of lots.

The comi-tragic solution on offer by the government and its appointees is to altogether do away with the retail investor in this segment, except through the indirect mutual fund route. Here are a few reasons why this line of thought is flawed:

• In the event of a small car (for which excise levies have been pruned in the latest Budget) getting smashed up on a highway by an unruly, traffic-insensitive truck, would banning small cars on the highway be the optimal solution?
• Given the number of scams that have already taken place in the secondary market, isn't it equally dangerous, if not more, to allow a retail investor to participate therein? Is it that the governmental agencies are more sensitive to the need of protecting the primary market investors than the secondary market investors?
• After making equity the 'default' asset class in India by a mile through capital gains exemptions and breaks, would it be right to leave the new converts (mind you, they are many and growing by the day) in the lurch by eliminating them from the primary market?
• Now that the 'multiple demat account' scam has been unearthed, what compensation, if any at all, do the governmental agencies propose to provide to the affected bonafide investors? The tab, of course, must be picked up by the registrars, banks and clearing houses involved, irrespective of its size.
• Notwithstanding the seriousness of the issue, can we avoid a wry smile when we read about 'hefty' fines of Rs 500,000 to Rs 10 lakh (Rs 1 million) that the accused banks, which facilitated (knowingly or unknowingly,) the scam, have been charge with.

To my mind, the solution lies elsewhere - a serious deterrent action against economic offenders. Sadly, Harshad Mehtas, Hiten Dalals, C R Bhansalis and Ketan Parikhs of Indian capital market infamy were never seen receiving any serious deterrent punishment.

Compare this with a member of the House of Commons in the UK being imprisoned for three months in 1984 for having submitted multiple applications against the public offer issued by British Telecom.

Here, we have a government and its appointees declaring an astonishing verdict where the victim (read as bonafide retail investor) is proposed to be sent to the gallows!

'Aam Aadmi' indeed!