Posted in Finance, Accounting and Economics Terms, Total Reads: 302
Spinning is the act of allocating shares to the preferred clientele of the brokerage company during initial public offering of any company. Hence, it is also termed as IPO Spinning. Spinning is done by the large brokerage houses to mainly develop a loyal client base for their firm.
However, according to a study it has been revealed that after 2001, the process of spinning by the large brokerage houses has reduced drastically, mainly because of tight regulatory framework and also due to scarcity of hot IPO’s on the exchanges. So, basically in the process of spinning the underwriters mainly allot shares to their preferred investors rather than through a competitive bidding process. This also helps these underwriters or investment banks to gain business from these clients at the future date.
However, this practice of spinning is considered unethical by a huge section of the financial services industry and it cheats the various other kinds of investors as well who invest in the market. These include retail investors who are forced to buy stocks of the company during an IPO in bulk and various shareholders of other third party big firms who were unable to leverage this spinning as compared to their other senior and same level executives who able to leverage the act of spinning.