Let's rethink IPOs
Now that the 11-month long correction of the bull markets of 2016 and 2017 is seemingly over with the healthy rollover to the December 2018 series in the F&O segment, investors can look forward to a cheerful Christmas and New Year despite the volatility that may still dog the stock markets.
The decline in crude oil prices has led to lower fuel prices in the automotive sector and the Rupee has started recovering, which should bring back the bull operators centre stage in 2019. If the electoral results in the 5 states favour the ruling alliance, crossing the previous Sensex and Nifty tops of 2017 is almost certain barring any unforeseen event in India or our neighborhood or any global trade war. Sensex at 40000 and Nifty at 12500 is a distinct possibility if all goes well on the economic front.
So while the secondary market may be in full fettle supported by a reinvigorated banking system and a chastened NBFC sector, what about the primary market which appears lost in this scenario? Although it has come a long way from the 1980s when an IPO clearance from the Controller of Capital Issues (CCI) was labelled as a 'licence to loot' and which is precisely what many promoters did since the mid-1980s. Greedy promoters aided and abetted by crafty brokers who doubled up as investment bankers joined the merry making as promoters raised pre-IPO funds from banks on the back of inflated costs and recovered almost their entire initial capital indirectly by over-invoicing plant and machinery and by private placement of shares at a premium ranging from 50 paise to Rs.10 per share applied for. Topping it all, the Morgan Stanley IPO yellow application form was sold on the footpaths in and around Dalal Street and Nariman Point for Rs.20 a piece! Imagine the tidy fortune raked in by the merchant bankers and brokers by just selling application forms to hungry investors. Selling of new issue application forms became a mini industry with Rajkot as the main centre where IPO forms were hawked like vegetables in a sabzi mandi at night.
And why not? The hunger for new issues was seen to be believed as issues like Ru-Ru Chapatis, a chapati maker from Pune, Om Advertising, a wall painter from Indore, Bonanza Pharma with just a rented table space near Dawa Bazar in Mumbai could venture to tap the primary market. The issue size was, however, modest ranging from just Rs.60000 to around Rs.25 lakh - peanuts by today's standards! Most projects never took off or were abandoned mid-way while those that did made sure that the allotment was in odd lots, which was a sure way to contain selling and maintain the share price as allottees returned the share certificates for splitting into marketable lots but never heard from the companies thereafter. A new odd lot market flourished wherein shares were bought at 15-20% lower than the quoted price or sold at an equivalent premium by the broker often in connivance with promoters or company officials.
Despite these pitfalls, investors chased new issues as share ownership imparted respectability to successful allottees. The shrewd ones, however, exited on listing to deploy the gains in the next offer. But those who invested for the long term suffered as barely 2% of these IPOs delivered.
It was, therefore, the right move by the Centre to abolish the office of the CCI and let SEBI take over. The rest is history as SEBI put up several check points and made merchant bankers accountable along with the promoters. The prospectus became the bible and slowed down the process as it took months for due diligence and by the time the process got over, the mood of the market changed forcing promoters to shelve the offer till the time is right. Many a time, the permission would lapse leaving no option to the promoters but to renew the mandate for another 12 months or drop the IPO plan altogether and seek alternate funding.
But the greatest lacuna that was exploited by promoters was their inability to share their future prospects to justify the premium sought on grounds of the SEBI fiat. The only indication was the avid interest of institutional or overseas investors who were keen to invest. It may not be out of place to suspect that future prospects of such offers may have been informally shared with such wholesale buyers while denied to retail investors and the media.
Can you believe that high profile issues at hefty premiums like Jet Airways, GVK Power & Infrastructure, GMR Infrastructure, etc. were subscribed within minutes of opening! But where are they today? While there is no denying the fact that a project is entitled to be sold at a premium to justify the work and finances of the promoters, no justification ever emerged as merchant bankers encashed the buoyant sentiment.
The classic case was of Reliance Power, which was sold at Rs.450/share of Rs.10 each at par to the value of the 25-year old power sector leader NTPC even though it was likely to post an EPS of just 1 Paisa after the 5th year. Yet the top 3 merchant bankers gave it the highest ranking given their long and strong relationship with the Ambani family. But the painful expression on their faces at the Q&A session belied their confidence in the offer. Little wonder, Mr. Anil Ambani was forced to issue 3:5 bonus to investors from his personal holding to assuage the anger that had built in by his high pitch promotion and bulldozing his way into the system by his money power and clout in financial markets. This IPO dealt a deathly blow to both the primary and secondary markets as the bulls ran scarce and bears took over and held sway of the stock market for almost two years!
There are many such examples. Suffice it say that no system is foolproof and crafty bankers will always help greedy promoters to exploit the lacunae in a system. What is, therefore, needed is a more rational and practical approach in marketing of new issues without being unfair to any player. The promoter should be entitled to his price but must be made to justify it to a panel of experts based on his background and experience, his project management skills and financial commitment to the project. SEBI should let him access the IPO proceeds from an escrow account in phases in keeping with his projected progress and deny him exiting the project till he has reasonably met 90% of his promises. The primary market is the first step in capital formation of an economy and vital to its growth and one can ignore it at one's own peril. While the earlier frenzy of the Eighties or Nineties is not called for, it cannot be allowed to stagnate like now. The ecosystem should be so designed that IPOs are a regular weekly/fortnightly features irrespective of the state of the secondary market. Listing within 4 days of closure of the issue and segregating the main board from the SME platform is a step in the right direction. Only a little more needs to be done to ensure that overpricing does not kill the primary market sentiment, which has been the case every time IPOs find favour with investors.