The IPO (Initial Public Offerings) mania is officially here. The TV Today issue, which was oversubscribed 35 times and listed at well over twice its office price last Friday, probably heralds its beginning. As with manic runs, the trigger for people’s greed and gambling instincts is always a good offer from a well-known company. In the run-up to what could be a new set of vanishing companies, TV Today’s spectacular debut may emerge an important signpost, unless the government installs some much needed roadblocks.
With Rs 22,000 crore worth of IPOs set to hit the primary market over the next 12 months, here is a look at what could follow. A cursory run through the risk factors of draft prospectuses posted on the SEBI’s website reveals a shortage of good issues and a long list of the most dubious offerings. There are, of course, several well-known media and entertainment companies, recognised banks and large, profitable, public sector companies that will offer good investment opportunities. But, more worrying are the scores of shady offerings, which will be fuelled by the nascent grey market that has already sprung up and is being nurtured by easy IPO funding from commercial banks. The prospectuses of such shifty companies are interesting. They candidly disclose ever-questionable details about their operations, apparently confident that investors will either not read or be deterred by the information.
What is common to most of these is a slew of litigation against management; unknown lead managers; projects and expansion plans that are not appraised by banks or financial institutions; and no statutory clearances such as those from the pollution board. Then there are the add-ons. For instance, a pharma says that all its approvals from the pollution control board and drug controller have lapsed and could shut down its existing business if they are not renewed.
Also, all its group companies are loss-making since inception and that it is raising money mainly to retire high-cost debt. Its own labour force has sued a Medicare company facing several other litigations as well. Several com- panies do not own the office premises that house their registered offices, reminding one of those that vanished from rented offices between 1992-96. These examples didn’t need to be ferreted out with exceptional effort. Doesn’t this indicate that investors must pre- pare for another IPO bubble that could kill the market in the long run? Or should the regulator take immediate steps to weed out obviously shady issues?
Investor groups have long demanded some restrictions on who can tap the primary market. Professor Manubhai Shah of the Consumer Education and Research Centre (CERC), Ahmedabad, has been campaigning for a merit rating and fairness criteria for public offerings, as exists in several American states, which insist that, apart from disclosures mandated by the Securities Exchange Commission (SEC), they would reserve the right to bar issues that don’t meet fairness and merit rating conditions, from being sold in those states. However, many of us are uncomfortable at the notion of another regulator vetting IPOs. Or, even with SEBI being empowered to decide who can tap the capital market.
The Mumbai-based Investor Grievances Forum has been toying with the concept of rating IPOs, but credit rating agencies, such as CRISIL, believe that it is impossible to rate public offerings in the same way as debt. On the other hand, many international rating agencies offer a service of analysing and evaluating IPOs and assigning marks to them on a scale of 1-100 or 1-10.
Such an independent evaluation is possible even in India, but the question is, who pays for it? It will have credibility only if it is independent and cannot work if companies are asked to have their own IPOs evaluated. Moreover, marks assigned to each IPO must not merely examine the project prospects but also evaluate whether an issue looks good at its particular offer price (or price band).
There is one possibility of ensuring an independent IPO evaluation and funding it too. The Investor Education and Protection Fund (IEPF) set up under Sec 305C of the Companies Act and created out of unclaimed dividends can be used for the purpose. If we agree that some independent rating/evaluation of public issues is an important tool to protect investors from misguided investments, then the IEPF must be involved in the effort. When last heard, IEPF had over Rs 178 crore in its kitty and is well able to finance such an effort in the interest of all investors. The rating agencies can be assigned to analyse specific prospectuses, when they are submitted to SEBI in the draft stage and posted for public scrutiny. The rating/ marks assigned to each issue can even be incorporated in the final prospectus that is statutorily published for investors.
The DCA will not be involved in the evaluation, nor will the IEPF. The entire exercise will be independent and, if anything, would put rating agencies reputations on the line. IEPF can set up a committee of referees to hear complaints (if any), and to ensure that the rating agencies are not persuaded to change or enhance the marks assigned to an IPO. Since the DCA and SEBI will broadly oversee the effort, it must be made clear to the rating agencies that they face the prospect of losing their registrations if they do a shoddy job.
There will be other advantages as well. The fact of an independent evaluation could cause companies and their investment bankers to become more conservative in their pricing. Second, it will deter shady companies from trying to tap public funds; and finally, if greedy investors insist on investing in shady issue, they will only have themselves to blame and cannot go whining to the regulators or the courts if the IPO market goes bust and causes them to lose money. -- Sucheta Dalal