Let's re­think IPOs

Money Times - - Editor’s Brief - By R.N. Gupta

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.

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